The IRS this week published the new applicable section 1446 withholding tax rates in the 2013 Form 8804-W, Installment Payments of Section 1446 Tax for Partnerships, and the 2013 (PDF)Instructions for Form 8804-W, Installment Payments of Section 1446 Tax for Partnerships (PDF).
A U.S. or foreign partnership (other than a publicly traded partnership) that has effectively connected taxable income (ECTI) allocable to its foreign partners generally is required to make quarterly installment deposits of section 1446 withholding with respect to ECTI allocable to its foreign partners if it expects the aggregate tax on the ECTI that is allocable to all its foreign partners to be $500 or more.
The installments generally are due with Form 8813 by the 15th day of the 4th, 6th, 9th, and 12th months of the partnership's tax year, and the partnership is required to notify the partner(s) of the amount of the partnership’s payments with respect to that partner within 10 days.
The applicable section 1446 withholding tax rate that a partnership is required to apply to ECTI allocable to a foreign partner generally is the highest rate under section 1 for individual partners and section 11(b)(1) for corporate partners. However, with respect to effectively connected capital gains allocable to an individual partner, a partnership may withhold at applicable preferential rates for capital gains.
If a partnership underpays an installment of section 1446 withholding tax, the partnership may owe a penalty for period of the underpayment of that withholding tax.
In addition to the penalty for underpayment of an installment of section 1446 withholding tax, a partnership must annually file Form 8804, Annual Return for Partnership Withholding Tax (Section 1446) and Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax.
A partnership is jointly and severally liable for an underpayment of and interest for underpayment of the section 1446 withholding tax liability determined on Form 8804.
IRS Form 8804-W is a worksheet that a partnership can use for computing each section 1446 quarterly withholding amount.
The 2013 Instructions for Form 8804-W state that Form 8804-W is to be completed for each installment payment of section 1446 withholding tax based on the information available at the time of the installment payment.
The 2013 Instructions to Form 8804-W discuss refiguring estimated section 1446 withholding tax, and suggest that a partnership that determines it has underpaid an installment of section 1446 withholding tax must make an immediate catch-up payment in order to reduce the amount of any penalty resulting from the underpayment of any earlier installments, whether caused by a change in estimate, failure to make a payment, or a mistake.
For more information, contact a tax professional with KPMG’s Washington National Tax:
202 533 4204