Instructions For 2008 Schedule Rt - State Of Wisconsin Page 8
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12Wisconsin Schedule RT Instructions
Page 8
• The interest expenses or rental expenses
half of some or all of its members, the tax rate
applicable to that composite return cannot be in-
were paid, accrued, or incurred using terms
cluded in the entity’s effective tax rate for that
that reflect an arm’s length relationship.
state.
Specific evidence that adequately supports that
However, taxes imposed at the entity level that
these criteria are met will vary based on the
are on (or measured by) net income or receipts
facts and circumstances. However, in general, if
may be included in the entity’s aggregate effec-
one or more of the factors listed below are pre-
tive tax rate. For example, Wisconsin’s recycling
sent, it is more likely that a deduction may not
surcharge, which is imposed on partnerships
be allowed.
and tax-option (S) corporations in sec. 77.93 (1)
and (3), Wis. Stats., may be included in the Wis-
These factors apply to related entity interest and
consin effective tax rate of a pass-through entity.
rental expenses under sec.
71.80(23)(a)3.
Wis. Stats., as well as to other types of related
Withholding taxes paid on income distributable
entity expenses.
to members may also be considered entity-level
taxes if the state, U.S. possession, or foreign
Note: The Department of Revenue has express
country imposes the withholding as a tax on the
statutory
authority
in
secs.
71.30(2)
and
income of the pass-through entity. For example,
71.80(1)(b), Wis. Stats., to distribute, apportion,
sec. 71.775, Wis. Stats., imposes a withholding
or allocate gross income, deductions, credits or
tax on a pass-through entity for the privilege of
allowances between or among two or more re-
doing business in Wisconsin or deriving income
lated entities in circumstances where it is neces-
from property located in Wisconsin. The amount
sary to prevent evasion of taxes or to clearly re-
of tax is equal to the nonresident member’s
flect the income of the related entities. This au-
share of Wisconsin distributable income multi-
thority includes all types of related entity ex-
plied by the highest tax rate applicable to the
penses.
nonresident member.
Factors for Related Entity Expenses in
You may use Worksheet B on page 12 to com-
General.
pute the Wisconsin effective tax rate of a pass-
1) There was no actual transfer of funds from
through entity. Computation of the effective tax
the taxpayer to the related entity, or the
rates applicable to other jurisdictions will depend
funds were substantially returned to the tax-
on the tax structures of those jurisdictions. The
payer, either directly or indirectly.
sum of these effective tax rates is the aggregate
effective tax rate applicable to the pass-through
2) If the transaction was entered on the advice
entity.
of a tax advisor, the advisor’s fee was de-
termined by reference to the tax savings.
Additional Guidance for Item A, Box iii.
3) The related entity does not regularly engage
in similar transactions with unrelated parties
Below are examples of factors the Department
on terms substantially similar to those of the
would consider relevant in determining whether
subject transaction.
the taxpayer meets all three of the criteria speci-
fied in sec. 71.80(23)(a)3.:
4) The transaction was not entered into at
terms comparable to arm’s length as deter-
• The primary motivation for the transaction
mined by Treas. Reg. 1.482-1(b).
was one or more business purposes other
5) There was no realistic expectation of profit
than the avoidance or reduction of state in-
from the transaction apart from the tax bene-
come or franchise taxes;
fits.
• The transaction changed the economic posi-
6) The transaction resulted in improper match-
tion of the taxpayer in a meaningful way apart
ing of income and expenses.
from tax effects; and
7) An expense for the transaction was accrued
under FIN 48.
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