Tax 3.01(5)(e)2.2. The transaction changed the economic position of the taxpayer in a meaningful way apart from tax effects. Tax 3.01(5)(e)3.3. The expenses were paid, accrued, or incurred using terms that reflect an arm’s length relationship. Tax 3.01(5)(f)(f) Evasion of taxes and distortion of income. A taxpayer meeting the criteria to deduct related entity expenses under s. 71.80 (23), Stats., but fails, whether intentionally or not, to disclose such related entity expenses as prescribed, the department at its discretion may disallow the corresponding income exclusion to the related entity and allow the expense to the taxpayer. Tax 3.01 NoteExample: Taxpayer A and Taxpayer B are related entities. A’s net income for the year is $50,000 and B’s net income is $750,000. A incurred $100,000 in interest expenses to B. Realizing there is a benefit to not disclosing the related entity expenses, A reports $150,000 in net income, and B reports $650,000 in net income. The department may disallow the interest income exclusion to B and allow the interest expense to A. As a result, A must report $50,000 of net income and B must report $750,000 of net income.
Tax 3.01(6)(a)1.1. As provided in s. Tax 2.61 (6) (a) 6., for related entity expenses paid, accrued, or incurred between combined group members, including pass-through entities owned by those members to the extent of their distributive shares of income, the addition modifications for related entity expenses under ss. 71.26 (2) (a) 7. and 71.45 (2) (a) 16., Stats., are not required to the extent the recipient of the income includes the income in the combined unitary income. The provisions under s. Tax 2.61 (6) (a) 6. only apply to corporations that are combined group members at the time of the transactions resulting in related entity expenses. Tax 3.01(6)(a)2.2. The addition modifications for addbacks are required in cases where related entity expenses are included in combined unitary income but the corresponding income is or was not included in the combined unitary income. To illustrate, without limiting the application of this subdivision in any way, a related entity expense paid, accrued, or incurred to a related entity that is not a combined group member is subject to the addback provisions. Likewise, a related entity expense paid, accrued, or incurred to a combined group member that excluded the corresponding income from the combined unitary income is subject to the addback provisions. Tax 3.01(6)(b)(b) Pass-through entities. Shareholders of a tax-option (S) corporation, members of a limited liability company treated as a partnership, partners of a general or limited partnership, and beneficiaries of trust and estates need not make an addition modification to their respective incomes in cases where their respective schedules K-1 report the related entity expenses as fully deductible. Tax 3.01(6)(c)(c) Disregarded entities. Transactions resulting in related entity expenses between an entity that is disregarded for Wisconsin income and franchise tax purposes and its owner need not be reported and disclosed. Tax 3.01(6)(d)(d) Individual itemized deduction credit. An individual who has paid, accrued, or incurred related entity expenses is not required to disclose such expenses on a form prescribed by the department if the individual reports the expenses as part of the individual’s itemized deduction credit under s. 71.07 (5), Stats. An individual wishing to treat related entity expenses as business expenses shall disclose such expenses on a form prescribed by the department as applicable. Tax 3.01(6)(e)(e) Taxpayers subject to apportionment. If a taxpayer is subject to apportionment, the taxpayer shall report and disclose the amounts that are required to be added back before apportionment. For purposes of determining the threshold amount of $100,000 under sub. (7) (b) 3., the taxpayer shall use the apportioned amounts. However, the taxpayer shall not multiply by the apportionment percentage those amounts of related entity expenses added back to income that are not attributable to apportionable income. The apportionment percentage shall be recomputed after any addbacks. Tax 3.01(7)(a)(a) Authority to distribute or disregard. Notwithstanding the modifications provided under ss. 71.05 (6) (b) 45., 71.26 (2) (a) 8., 71.34 (1k) (k), and 71.45 (2) (a) 17., Stats., the department has express authority under ss. 71.30 (2) and 71.80 (1) (b), Stats., to distribute, apportion, or allocate income, deductions, credits, or allowances between or among related entities in order to prevent evasion of taxes or to clearly reflect the income of the entities. Additionally, the department has express authority under ss. 71.30 (2m) and 71.80 (1m), Stats., to disregard transactions between related entities if those transactions lack economic substance. This authority is also applicable to the modifications under ss. 71.05 (6) (b) 46., 71.26 (2) (a) 9., 71.34 (1k) (L), and 71.45 (2) (a) 18., Stats. Tax 3.01(7)(b)1.1. A taxpayer with related entity expenses shall disclose such expenses on or before the extended due date of the return for the year in which the expenses are reported. The department is authorized to disallow related entity expenses, even if the expenses meet the conditions in s. 71.80 (23) (a), Stats., and sub. (4) for failure to timely disclose such expenses. The form prescribed by the department to disclose related entity expenses shall not be accepted by the department if filed with an amended return after the extended due date. Failure to disclose or untimely disclosure by a taxpayer subjects the taxpayer and related entities to the provisions of sub. (5) (f). Tax 3.01(7)(b)2.2. A pass-through entity is responsible for timely disclosing related entity expenses on a form prescribed by the department. The shareholder, partner, member, or beneficiary is not responsible for disclosing related entity expenses if such expenses are passed through to them. A shareholder, partner, member, or beneficiary having related entity expenses independent of those passed through to them shall disclose such expenses on a form prescribed by the department as applicable. Tax 3.01(7)(b)3.3. A taxpayer is not required to disclose related entity expenses on a separate form prescribed by the department if the total interest, rent, and intangible expenses and management fees paid, accrued, or incurred to all related entities reduces the taxpayer’s net income by a total amount that is equal to or less than $100,000. If the taxpayer has related entity expenses that reduce the taxpayer’s net income by more than a total of $100,000, the taxpayer shall file and disclose such expenses on a form prescribed by the department. For multistate taxpayers, the $100,000 threshold is determined after applying the Wisconsin apportionment percentage. If the taxpayer is a pass-through entity, the $100,000, threshold is determined at the entity level. The fact that a taxpayer’s total related entity expenses do not surpass the $100,000 threshold amount does not preclude the department from enforcing the addback provisions against the taxpayer. Tax 3.01 HistoryHistory: CR 10-095: cr. Register November 2010 No. 659, eff. 12-1-10; correction in (2) (m) and renumbering of (2) (h) and (i) made under s. 13.92 (4) (b) 1. and 7., Stats., Register November 2010 No. 659; CR 12-011: am. (4) (e) 4. b. Register July 2012 No. 679, eff. 8-1-12; CR 14-005: am. (4) (e) 4. b. Register August 2014 No. 704, eff. 9-1-14; CR 17-019: am. (7) (b) 1., Register June 2018 No. 750 eff. 7-1-18. Tax 3.02Tax 3.02 Pass-through entity withholding. Tax 3.02(1)(1) Purpose. This section provides additional guidance with respect to the treatment of withholding tax for pass-through entities. Tax 3.02(2)(2) Credit for nonresident entertainer, lottery, and pari-mutuel withholding. A pass-through entity may elect to allocate nonresident entertainer, lottery, and pari-mutuel withholding to its nonresident partners, members, shareholders, or beneficiaries, but only to the extent the income subject to withholding is allocated to those partners, members, shareholders, or beneficiaries. A pass-through entity may credit amounts withheld under ss. 71.64 (5) and 71.67 (4) and (5), Stats., or amounts paid or deposited under s. 71.80 (15) (b) or (c), Stats., against the withholding amounts required under s. 71.775 (2), Stats., to such extent, in the manner and form prescribed by the department. Tax 3.02 NoteExample: Basement Rockers is a four-member rock band. Basement Rockers is a tax-option (S) corporation and its four rock stars are the corporation’s shareholders. They are nonresidents of Wisconsin. The band plays in three different venues in Wisconsin during the taxable year and each venue pays the band $10,000. For Venue 1, neither a surety bond is filed nor cash deposited. The venue withholds 6% and immediately pays the amount withheld to the department. For Venue 2, a bond is not filed, cash is not deposited, and no amounts are withheld. For Venue 3, Basement Rockers files a surety bond for 6% of the total contract price. Basement Rockers may only elect to allocate to its shareholders the amounts for Venue 1 and Venue 3.
Tax 3.02 HistoryHistory: CR 10-095: cr. Register November 2010 No. 659, eff. 12-1-10. Tax 3.03Tax 3.03 Dividends received deduction — corporations. Tax 3.03(1)(1) Purpose. This section clarifies the deduction from gross income allowed to corporations for dividends received. Dividends may be deductible due to the recipient’s ownership of the payer corporation, as provided in sub. (3). Tax 3.03(2)(2) Definition. “Dividends received” means gross dividends minus taxes on those dividends paid to a foreign nation and claimed as a deduction under ch. 71, Stats. Tax 3.03(3)(3) Dividends deductible due to ownership. A corporation may deduct from gross income 100 percent of the dividends received from a payer corporation during a taxable year if both of the following occur: