Montana residents who are owners of a pass-through entity (PTE) that paid income taxes in another state may be eligible for the credit for the income taxes paid to another state. The credit is available for a resident’s distributive share of an income tax imposed by and paid to another state on the PTE’s activity in that state. The tax may be paid by the owner or the PTE itself. Examples of taxes that qualify for the credit include:
- Pass-through entity composite taxes
- Excise taxes or franchise taxes that are imposed and measured on net income
- Pass-through entity taxes paid on income derived from sources within the other state
The credit is only available to the extent of the owner’s income tax liability in the other state. It isn’t allowed on any excess tax paid by the PTE in that other state carried over to the next year.
To calculate the credit, the pass-through owner uses the owner’s distributive share of the other state’s tax paid to the other state. The owner’s distributive share of income sourced to the other state, as well as the amount of tax paid, must be clearly identified on documentation received from the PTE. The credit is claimed on Form 2, Credit for Income Tax Paid to Another State or Country Schedule. Before claiming the credit, the owner’s distributive share of any deduction for the other state’s income tax must be added back to Federal Adjusted Gross Income. Report the add-back of the other state’s income tax on Form 2, Additions Schedule, line 14.
For more information see Credit for Income Taxes Paid to Another State or Country.