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payroll or nonresident shareholder withholding liability for the

in IC 6-3-2-2(b). Whenever a S corporation has a nonresident

year, do not submit the payment with Form WH-3; instead,

shareholder and conducts business within and outside Indiana,

complete Form WH-1U included with the WH-3 packet and

the S Corporation must include the apportionment worksheet

submit the payment under separate cover. The Indiana taxpayer

with Form IT-20S. Form IT-40PNR, Indiana Part-Year or

identification number and the period to which the payment

Nonresident Individual Income Tax Return, will be completed

should be applied must also be indicated. (Form DB020W-NR

by the shareholders. Credit must be claimed on that return

on page 23 is for use in making an initial payment of the

by attaching state Form WH-18 for amounts withheld by the

withholding tax due on once-a-year income distributions to

S corporation from the shareholder's distributive share of

nonresident shareholders).

income. Nonresident shareholders are exempt from the

Specific instructions for completing Form WH-18 are found

filing requirements of an Indiana Individual Income Tax

on the reverse side of that form. A supply of these forms is

Return only if they are included as members of a

available from the Department upon request.

composite return.

A part-year nonresident shareholder will be required to

How to Register as a Withholding Agent

file Form IT-40PNR reporting the total amount of income (loss)

A S corporation with any withholding liability as described

received while residing in Indiana and that part of Indiana source

above is required to register as an Indiana withholding agent.

income received while a nonresident. Apportioned Indiana

The Department assigns an Indiana taxpayer identification

income (loss), as modified, received by a nonresident of Indiana

number (TID) consisting of a ten (10) digit number exclusive to

is also reported on Form IT-40PNR. Note: Passive losses

the taxpayer and a three (3) digit number for the location being

may not exceed the limits imposed by IRC Section 469.

registered.

Losses may not exceed the shareholder's investment. See

The S corporation has two options in registering as a

IRC Section 704.

withholding agent. The first option is to request and to file the

Indiana Department of Revenue Business Tax Application, Form

Other Shareholders

BT-1, for the corporation. Request Form BT-1 and Instructions

Other shareholders that are trusts or estates will report

for Withholding Registration by calling the Taxpayer Services

their distributive shares of the S corporation income (loss) on

Division at (317) 233-4016. It takes approximately two to three

Form IT-41. All distributions are fully taxable for income tax

weeks to process an application that has been mailed to the

purposes. For adjusted gross income, taxable S corporation

Indiana Department of Revenue; however, any initial withholding

income will include pro rata Indiana modifications; however,

payments can be remitted with the application. The BT-1 can

losses may not exceed the limits imposed by IRC Sections

be completed online at

469 and 704.

The second option is to visit either the downtown

Shareholders doing business both within and outside

Indianapolis office of the Department or one of the district

Indiana must also determine their taxable income from Indiana

offices located throughout the state to be registered the same

sources through the use of the allocation and apportionment

day.

provisions contained in IC 6-3-2-2(b)-(h). See the three factor

apportionment schedule.

Shareholders' Liability and Filing Requirements

Business income, including all S corporation income,

A shareholder’s share of profit or loss from a S corporation

apportioned to Indiana plus nonbusiness income allocated to

will be included in the shareholder’s calculation of federal

Indiana (plus modifications required by IC 6-3-1-3.5(a) for

adjusted gross income and is generally subject to the same

adjusted gross income tax) equals the taxpayer’s net taxable

rules for arriving at Indiana adjusted gross income. Therefore,

income for Indiana tax purposes.

a shareholder’s distributive share, before any modifications

required by Indiana statutes, is the same ratio and amount

Basis of Stock in an S Corporation

as determined under IRC Section 704 and its prescribed

For Indiana income tax purposes, the basis of the

regulations. The shareholders will include their share of all

shareholder’s stock in a S corporation will generally be the

S corporation income, whether distributed or undistributed,

same as its basis for federal income tax purposes. Special

on their separate or individual Indiana income tax returns. Each

adjustments to income and loss under the Indiana Adjusted

shareholder’s distributive share of income will be adjusted by

Gross Income Tax Act (for the add back of income taxes and

modifications provided for in IC 6-3-1-3.5(a) or (b).

the deduction from income for U.S. Government obligations)

are limited to current reporting but may also affect the

Individual Shareholders

shareholder’s basis.

Residents - A resident shareholder reports the entire

distributive share of S corporation income (loss) as adjusted,

Example - Indiana S Corporation Income for Individual

no matter where the S corporation’s business is located or in

Shareholders

which states it does business. Form IT-40, Indiana Individual

Taxpayer A, a resident of Indiana, and Taxpayer B, a

Income Tax Return, will be completed by the individual

nonresident of Indiana, each have a fifty (50) percent stock

shareholders.

interest in XYZ, Inc., an Indiana S corporation doing business

Nonresidents - Part and full-year nonresident shareholders

both within and outside of Indiana.

report their share of S corporation income (loss) as adjusted,

XYZ, Inc. has income from operations of $530,000 and

derived from or attributed to sources within Indiana as

expenses of $500,000. Of these expenses, $35,000 is an

determined by the use of the apportionment formula described

expense for state income tax.

Form It-20s - S Corporation Income Tax Booklet - Indiana Department Of Revenue - 2005 Page 5

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