2.9 Income Taxes Paid by the Entity on Behalf of Its Owners

A pass-through entity, which would not normally be subject to tax, may elect to pay income taxes under a pass-through entity tax regime. In these situations, ASC 740 provides guidance on whether the income taxes are attributed to the pass-through entity or its owners. The determination is based on the laws and regulations of each specific jurisdiction. If an income tax is attributable to the entity, the entity should account for the tax in accordance with ASC 740, including the recognition of deferred taxes if applicable. Conversely, if an income tax is attributable to the owners, the pass-through entity would account for the income taxes paid by applying other guidance. The examples in ASC 740-10-55-226 through 55-228 provide a high-level framework for making this assessment:

ASC 740-10

Example 35: Attribution of Income Taxes to the Entity or Its Owners

55-226 Entity A, a partnership with two partners — Partner 1 and Partner 2 — has nexus in Jurisdiction J. Jurisdiction J assesses an income tax on Entity A and allows Partners 1 and 2 to file a tax return and use their pro rata share of Entity A’s income tax payment as a credit (that is, payment against the tax liability of the owners). Because the owners may file a tax return and utilize Entity A’s payment as a payment against their personal income tax, the income tax would be attributed to the owners by Jurisdiction J’s laws whether or not the owners file an income tax return. Because the income tax has been attributed to the owners, payments to Jurisdiction J for income taxes should be treated as a transaction with the owners. The result would not change even if there were an agreement between Entity A and its two partners requiring Entity A to reimburse Partners 1 and 2 for any taxes the partners may owe to Jurisdiction J. This is because attribution is based on the laws and regulations of the taxing authority rather than on obligations imposed by agreements between an entity and its owners.

Example 36: Attribution of Income Taxes to the Entity or Its Owners

55-227 If the fact pattern in paragraph 740-10-55-226 changed such that Jurisdiction J has no provision for the owners to file tax returns and the laws and regulations of Jurisdiction J do not indicate that the payments are made on behalf of Partners 1 and 2, income taxes are attributed to Entity A on the basis of Jurisdiction J’s laws and are accounted for based on the guidance in this Subtopic.

Example 37: Attribution of Income Taxes to the Entity or Its Owners

55-228 Entity S, an S Corporation, files a tax return in Jurisdiction J. An analysis of the laws and regulations of Jurisdiction J indicates that Jurisdiction J can hold Entity S and its owners jointly and severally liable for payment of income taxes. The laws and regulations also indicate that if payment is made by Entity S, the payments are made on behalf of the owners. Because the laws and regulations attribute the income tax to the owners regardless of who pays the tax, any payments to Jurisdiction J for income taxes should be treated as a transaction with its owners.

The examples in the guidance above highlight certain characteristics that an entity should consider, including:

Whether the jurisdiction also allows the owners to file tax returns and use their pro rata share of tax paid by the entity as a credit against their tax liability.
Whether the entity and the owners are joint and severally liable for payment of income taxes in the jurisdiction.

In many cases, however, the tax law may not specifically state whether the entity and the owners are jointly and severally liable. In these instances, an entity should consider the following:

Whether the owners are ultimately liable if the entity is required (or makes an election) but ultimately fails to pay the tax.
Whether the entity, owners, or both are responsible for paying taxes associated with uncertain tax positions.

No single characteristic is individually determinative with respect to an evaluation of the scope of the taxes paid. Rather, a preponderance of the evidence would be needed to support the conclusion reached. Accordingly, determining whether a tax is attributable to the entity or the owner may be challenging and will, by definition, depend on the specific laws and regulations of the respective jurisdictions.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.