Question

For the state of New Mexico and Colorado, I need the following questions answered please:

a) To what extent does New Mexico and Colorado follow the rulings of the Multistate Tax Commission?

b) Does New Mexico and Colorado adopt pertinent changes to the Internal Revenue Code? If so, as of what date?

c) Is the tax effectiveness of a passive investment company limited in some way? Has New Mexico and Colorado adopted the Geoffrey approach to the taxation of income from intangibles? Explain.

d) Does New Mexico and Colorado apply entity-level income taxes for S Corporations, partnerships, and LLCs? If so, what are the terms of those taxes?

Thank you.

Answer 1

Please mentioned below the answer

Ans a): The Multistate Tax Commission celebrated its 50th anniversary in 2017. MTC history is entwined with the history of interstate business taxation, especially its constitutional and legislative roots. Although the MTC was born in 1967, the events that sparked its formation began on October 14, 1958 in the U.S. Supreme Court. On that day, the Court heard argument in the case of Northwestern States Portland Cement Co. v. Minnesota.

On June 19, 1967, the state of New Mexico became the fourth state to enact the Multistate Tax Compact. In December 1995, 26 states signed onto the MTC’s Nexus Program Bulletin 95-1. The bulletin set out the states’ position that a computer manufacturer’s use of third-party warranty service providers, a common practice within the industry, established sales and use tax nexus for those manufacturers, who were beginning to sell directly to consumers. That position proved controversial, especially for California. At the MTC’s general session in Colorado on June 2, 1975, Colorado Gov. Lamm presented welcoming remarks that included: “I have found, not only in my short time as governor but also during eight years in the legislature, that it is often the most important groups that are, like you, relatively unsung and unheralded in carrying on silently the very good work that you have done.” On August 20, 2013, the Tenth Circuit Court of Appeals ruled that it lacked jurisdiction under the Tax Injunction Act to hear DMA’s challenge to Colorado’s use tax reporting requirements. This was an intermediary step in a much longer process, one that the MTC was involved in from the beginning. But in retrospect, the court’s ruling was also a turning point. It was this ruling that would be appealed to the U.S. Supreme Court.

Ans b) : The Internal Revenue Code (IRC) refers to Title 26 of the U.S. Code, the official "consolidation and codification of the general and permanent laws of the United States," as the Code's preface explains. Commonly referred to as the IRS code or IRS tax code, the laws in Title 26 are enforced by the Internal Revenue Service (IRS). The United States Code was first published in 1926 by the U.S. House of Representatives. Title 26 covers all relevant rules pertaining to income, gift, estate, sales, payroll, and excise taxes. No changes adopted Mexico and Colorado for pertinent changes to the Internal Revenue Code.

Ans c) : The Delaware corporate tax rate is 8.7%, higher than the average state corporate tax rate across the United States, not all income, however is taxed at this rate in Delaware. Delaware does not impose tax on companies deriving income from intangibles possessed or owned in-state. A business needs to meet the following statutory requirements to generate tax saving from Delaware passive investment company (PIC).

The nine states which are enforcing the Geoffrey doctrine without specific legislative authority are: Colorado, Georgia, Maryland, Missouri, Mississippi, New Hampshire, New Mexico, Rhode Island, and Tennessee.

Ans d): New Mexico recognizes the federal S election, and New Mexico S corporations are not required to pay corporate income tax to the state; however, New Mexico S corporations are required to pay the $50 franchise tax. Also, an individual S corporation shareholder will owe tax on his or her share of the company's income. New Mexico has a corporate income tax, which applies to traditional (C-type) corporations, and a franchise tax, which applies to traditional corporations and S corporations. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal New Mexico tax return.

New Mexico taxes corporate income at a series of marginal rates. The rates, and sometimes the brackets, have changed annually over the last half dozen years. For 2018, the rates and brackets are as follows:

• total net income not over $500,000 = 4.8% tax
• total net income over $500,000 = $24,000 plus 5.9% of net income over $500,000.

Like S corporations, standard LLCs are pass-through entities and, generally speaking, are not required to pay income tax to either the federal government or the State of New Mexico. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.Also, while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, disregarded entities), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to New Mexico’s corporate income tax. Example: For the 2018 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $600,000. Each of LLC member will pay tax on his or her individual state tax return on his or her portion of the $600,000 in net income. The rate each member pays will vary depending on his or her overall taxable income for the year.

Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns.

Example: For the 2018 tax year, your partnership had net income of $600,000. The $600,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns. The rate each partner pays will vary depending on his or her overall taxable income for them

The tax due on the composite filing shall be 4.63% of the Colorado-source income of the partners or shareholders included in the composite return. ... Withhold 4.63% of each nonresident partner/shareholder's Colorado source income and submit the payment with form dR 0108.

An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect S status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, each individual shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations are pass-through entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Colorado recognizes the federal S election, and Colorado S corporations are not required to pay tax to the state. However, individual S corporation shareholders will owe tax on their share of the corporation’s income.

Example: For the latest tax year, your S corporation had net income of $100,000. The $100,000 in net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).

Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Colorado. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, disregarded entities), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Colorado’s corporate income tax.

Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow LLC members, and you will each pay tax on your own portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).

Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns.

Example: For the latest tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).