Franchise Tax Board Resident & Nonresident Withholding Guidelines November 2009 On February 9, 2009, the Franchise Tax Board (FTB) issued new franchise tax nonresident withholding guidelines. California residential property managers for out-ofstate owners are now required to withhold a percentage of their payments and forward it to the Franchise Tax Board. These guidelines differ from the Board s previous guidelines, which exempted residential property from the withholding requirements. 1. Which Payments are Subject to the Withholding Requirement? Property management companies are now required to withhold 7 percent of all payments or distributions associated with rents paid to out-of-state domestic owners on a monthly basis when the payments are greater than $1,500 per calendar year. The management company must on a quarterly basis - forward those funds on to the Franchise Tax Board along with the required FTB forms. 2. Are Property Expenses Subject to Withholding? If expenses are reimbursements and are separately accounted for, and not subject to 1099 reporting, then withholding is not required when calculating the percentage withheld. 3. Is the Amount to be withheld based on net or gross rent? The Franchise Tax Board Guidelines uses the term gross. The FTB requires the withholding of 7 percent of the gross payment made to a nonresident. The Guidelines define withholding as a prepayment of California state income or franchise tax (similar to wage withholding). The Guidelines allow the withholding agent to use a reasonable method to calculate the withholding. The withholding agent, therefore, may deduct their management fees and other property expenses and then calculate the 7 percent withholding based on the amount to be sent to the property owner. Use Form 589 Nonresident Reduce Withholding Request to list the expenses and file the form with the FTB. If the only expense deducted is the management fee, then Form 589 is not required. 1
Example of withholding calculation: Monthly Unit Rent $4,000 Management Fee - 250 Utilities/Water - 100 Repairs - 650 $3,000 X 7% Total Withholding $210 4. Can the mortgage interest be included as an expense? Yes. The interest portion of the mortgage is eligible to be claimed as an expense by the property owner on Form 589. 5. Which Entities Are Subject to Withholding? Individuals who are non-residents of California; Corporations, Partnerships and LLC s that do not have a permanent place of business in California and are not qualified by the Secretary of State to do business in California; or Nonresident estates and trusts. Foreign Partners Foreign Partners are withheld on their allocable share of California source income multiplied by the rates previously mentioned This is a significant difference from domestic partners who are withheld on the amount actually distributed. There is no provision in R&TC Section 18666 or IRC Section 1446 to allow waivers or reduced withholding for foreign partners There is no minimum threshold for the withholding requirement Foreign partners who are nonresident alien individuals, foreign corporations, foreign partnerships, foreign estates, or foreign trusts are subject to foreign partner withholding. 6. FTB Pub. 1017 (Rev 01-2009) on page 5, item 11, shows foreign partners rate is 9.3 to 10.84 percent. Is this correct? The withholding rate is 7 percent for both nonresident domestic and foreign recipients of California rents or royalties. 2
7. Which Entities are Exempt from Withholding? California residents Corporations, Partnerships, LLC s qualified to do business in California with a permanent place of business in California Estates where the deceased was a California resident at the time of death The total payments or distributions of California source income to the nonresident are equal to or less than $1,500 for the calendar year. Tax-exempt organizations Insurance Companies, IRA s, Qualified Pension and Profit Sharing Plans California non-grantor trusts Additional Exempt Entities An out-of-state owner who meets one of the exemptions on Form 590, Withholding Exemption Certificate and files the Form An out-of-state owner who has received written authorization from the FTB waiving the withholding. See Waiver discussion. An owner is a bank or banking association. Note: Owners must complete Form 590 to certify their status. A link to the form is provided below. Exemptions apply to the actual payee and not to their agent or representative. 8. How do Management Companies Determine who is a California Resident? Every individual who is in California for other than a temporary or transitory purpose Every individual domiciled in California who is absent for a temporary or transitory purpose An individual who comes to perform a particular contract of short duration will be considered a nonresident 9. What if the property owner is part of the military and has been deployed? Prior to deployment, if the military member was a California resident and they maintain that status with the military, then they would be exempt from the withholding. The property manager should have the owner complete Form 590 and keep it in the files. 10. What does a Permanent Place of Business in California mean? If a property owner has a California street address, no withholding is required and Form 590 is not needed to verify residency. A corporation has a permanent place of business in this state when it is organized and existing under the laws of the state or it has qualified through the Secretary of State to transact intrastate business. 3
11. Who Identifies Exempt Owners? The management company identifies owners who are exempt. If a valid Form 590 has been filed: In order for Form 590 to be valid the payees must include their taxpayer identification number. Withholding agents can rely on a California street address as an indication of an owner s residency status. If the payee has a California street address, no withholding is required and Form 590 is not needed to verify residency status unless the withholding agent has reason to believe such address is merely a forwarding address. A valid California street address does not include a California post office box, or an in care of address. If a change of address occurs, the withholding agent must reevaluate the owner s residency status. If withholding agents need assistance in this area, they can contact the FTB at 916.845.4900. 12. Are management companies to keep Form 590 on file in case of an audit? Yes 13. Does the Form 590 need to be filled out each year? No. See FTB Publication 1017, page 9, question 41 14. I have received some 590 Forms from a few of our clients. Am I supposed to send them to the FTB? Form 590 is kept by the withholding agent 15. If the Management Company Deposits the Rent into a California Bank Account for the Owner, but the Owner Lives out of state, does the Management Company have to Withhold Funds? Yes, you must withhold funds. The FTB guidelines address the physical address of the property owner. 16. If a Company only charges a Lease Listing Fee to Lease a Property and does not Manage the Property, does the Company have to Withhold the 7 percent for an Out-of-State Owner? If the company, as the leasing agent, thereafter takes money from tenants for rent and the rents total more than $1,500 for the calendar year, then yes, the company must withhold 7 percent, after deducting the appropriate fees, before forwarding those dollars to the owner. 4
17. I would like to request a reduced withholding. How do I do that? Form 589 Nonresident Reduced Withholding Request can be submitted, if the 7% withholding on the California source payment results in significant over withholding The Form must be submitted at least 10 business days prior to receiving the payment. Reduced Withholding are available for domestic nonresident payees only. 18. Who Qualifies for Waivers of Withholding? Owners will qualify for a waiver if: They have California tax returns on file for the past two taxable years in which there was a filing requirement and is considered current on any outstanding FTB tax obligations If the payee has no filing history but is making estimated tax payments for the current year and is current on any outstanding FTB tax obligations Waivers are available to domestic out of state owners only. The waiver can be applicable to the first payment received Request is generally responded to within 21 working days of the filing 19. How do I Request a Waiver from the Withholding Requirements? Complete and File FTB Form 588 and attach any pertinent information Submit to: Withholding Services and Compliance Franchise Tax Board P.O. 942867 Sacramento, California 94267-0651 5
20. When are Withholding Payments Due? Form 592 and the payment of tax withheld have specific payment due dates: January 1 March 31 Due: April 15 April 1 May 31 Due: June 15 June 1 August 31 Due: September 15 Sept. 1 Dec. 31 Due: January 15 21. Does the management company submit one Form 592 for each owner or one Form 592 for all withholdings? One Form 592 for all withholdings for the specific quarter. 22. Can the management company have the out-of-state owner sign an agreement stating that the owner will withhold the 7 percent payment? No. The withholding agent is responsible for the withholding. 23. What type of language should I include in my management contract or any addendum entered into with the owner? Language created by the Department of Real Estate is as follows: (the Principal ) authorizes (the Property Manager ) to remit trust funds of the Principal -- which funds may consist in whole or part of rent or rents and other taxable income collected for the Principal by the Property Manager to the California Franchise Tax Board as and for withholding taxes, when the Principal is subject to the Non-Resident Withholding Requirement under the statutory mandate of California Revenue and Taxation Code sections 18662, 18664 18666, 18668, and 17951. 24. If we manage 150 homes, can we send one check to FTB with details, or do we need to send 150 checks? You can send one check with Form 592 listing all payees. 25. What is the property manager s exposure or liability for failure to report? The penalty for a withholding agent who fails to furnish correct and timely Forms 592-B to payees is $50 per form. If the agent s failure is due to intentional disregard of the requirement, the penalty is $100 or 10 percent of the amount required to be reported whichever is greater. 6
Additional late penalties also apply: FTB Links Links: $15 if filed on or before 30 days of the due date. $30 if filed on or before 6 months of the due date. $50 if filed after 6 months of the due date. $100 or 10 percent of the amount required to be reported whichever is greater, if the failure is due to intentional disregard of the requirements. Franchise Tax Board Resident & Nonresident Withholding Guidelines http://www.ftb.ca.gov/forms/2009/09_1017.pdf Form 588 Nonresident Withholding Waiver Request http://www.ftb.ca.gov/forms/2009/09_588.pdf Form 590 Exemption Certificate http://www.ftb.ca.gov/forms/2009/09_590.pdf Form 590-P- Withholding Exemption Certificate http://www.ftb.ca.gov/forms/2009/09_590p.pdf Form 592 Quarterly Resident & Nonresident Withholding Statement http://www.ftb.ca.gov/forms/2009/09_592.pdf Form 592-B Resident and Nonresident Withholding Tax Statement http://www.ftb.ca.gov/forms/2009/09_592b.pdf Sample letter from Management Company to Out-of-State Owner http://www.caanet.org/am/template.cfm?section=general_information&template=/cm/contentdisplay. cfm&contentid=20094 Still have questions? For more information: Contact the California Franchise Tax Board: (888) 792-4900 or www.ftb.ca.gov. CAA Website: Link to CAA s Power Point presentation with completed sample forms: http://www.caanet.org/am/template.cfm?section=general_information&template=/cm/contentdisplay.cfm&cont ENTID=20093 Contact your accountant 7