Montana source income includes but is not limited to any income, gains, losses, or credits from:
If a business receives income from another pass-through entity, any Montana source income that entity passes through counts as Montana source income.
Please Note:
Resident individuals, estates, and trusts are taxed on their world-wide income. Therefore, they include a pass-through entities entire income as Montana source income.
An entity may earn Montana source income from activities carried out inside or outside Montana.
| Only in Montana | If you are doing business only in Montana, all your income is Montana source income. |
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| In and Out of Montana | If you do business both inside and outside Montana, your Montana source income includes:
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With some exceptions, states are prohibited from imposing income tax on businesses whose only activity in that state is the sale of tangible personal products. Please refer to ARM 42.26.501 and Public Law 86-272 for more information on what business activities are taxable versus non-taxable.
If a business is required to file a return in Montana, the business is said to have nexus in Montana.
The Nexus Questionnaire (Form NEXUS) can be used to help determine if a business has nexus in Montana.
Montana has adopted sections of the Multistate Tax Compact guidelines for determining what share of your business income is reportable to Montana.
See ARM Title 42, Chapter 9 and Chapter 26 for more details.
Please Note:
If these rules do not fairly represent a business's activity in Montana, it may petition the department to use an alternate method such as separate accounting, excluding one or more factors, or including additional factors.
This petition must be filed before the entity files its first Montana return.
Apportionable income is determined using a transactional test and a functional test. These tests do not depend on the type of income, but if the income is derived by the entity's trade or business.
This determination is done at the entity level and ignores how the income is treated on on the owner's return. As a result, dividend and interest income used to apply the passive loss limitation rules under IRC ยง 469 on the owner's return has not effect on classification:
See ARM 42.9 and 42.26 for more information.
For tax periods beginning on or before June 30, 2021, Montana used an equally-weighted 3 factor apportionment formula consisting of property, payroll, and receipts. For tax periods beginning after June 30, 2021, the apportionment formula has been changed to use a double-weighted receipts factor. This new formula consists of property, payroll, and the receipts factor counted twice.
For periods beginning after December 31, 2024, the apportionment formula will include only the receipts factor.
The property factor is a fraction determined by the average values of real and tangible property owned, leased, or rented by the entity.
Find the factor by dividing the average value of property in Montana used to produce apportionable income during the tax period by the average value of all property used to produce apportionable income during the tax period.
Property Factor = (Montana Property Value)/(Total Property Value)
See ARM 42.26.231 and 42.26.237 for more information.
Property owned by the pass-through entity is valued at its original cost.
Real and tangible personal property used in the course of business includes:
It does not include money, accounts receivable, other intangible property, real property that is held for investment or nonbusiness purposes or idle property of any nature.
Migratory or mobile property used in Montana must be included in both average property values.
Unless otherwise required, the average value of owned property is determined by averaging the values at the beginning and end of the tax period.
Rented property is valued at eight times the net annual rental rate. Rental expense cannot be averaged and the current year's rental expense must be used in the property factor.
The payroll factor is determined by the amount paid for compensation attributable to the production of apportionable income during the tax period.
Find the factor by dividing the compensation paid in Montana by the total compensation.
Payroll Factor = (Montana Compensation)/(Total Compensation)
See ARM 42.26.241, 42.26.243 and 42.26.244 for more information.
Payroll is considered paid in Montana if:
The receipts factor is determined by the income received during the tax period.
Find the factor by dividing the total gross receipts received in Montana by the total of all gross receipts received by the entity.
Receipts Factor = (Montana Receipts)/(Total Receipts)
Assigning receipts:
Nonapportionable income means all income other than apportionable income.
More specifically nonapportionable income is income for which both the transactional test and the functional test failed.
Nonapportionable income is allocated to Montana depending on its character and the facts attached to the income.
For income determined to be nonapportionable, the following are examples of items that must be allocated to Montana:
A patent is utilized in Montana to the extent that it is employed in production, fabrication, manufacturing, or other processing in Montana or to the extent that a patented product is produced in Montana.
A copyright is utilized in Montana to the extent that printing or other publication originates in Montana.
If the basis of receipts from copyright or patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright or patent is utilized in the state in which the taxpayer's commercial domicile is located.
The original entity that generates income determines the state sourcing and characteristic of the income. The type of income and state sourcing stays the same when passed on to another entity.
Montana source income received from another pass-through entity is not included in apportionment and cannot be re-characterized.
The practical consequence is that flow-through income received on Schedules K-1 issued by a first-tier must be separated from the trade or business of a second-tier before this second-tier classifies its items of income from its own trade or business into apportionable income and nonapportionable income. In a second step, the flow-through Montana source income from the first-tier must be added to the Montana source income derived from the second-tier trade or business activities.
See ARM 42.9.107 for more information on how to report income received from another pass-through entity.
Items of Montana source income that are aggregated on the second-tier return determine the basis used for the calculation of withholding or composite tax if required. Thus, income may be offset by a loss derived from activities occurring at another tier.
Please Note:
This does not apply to partnerships and S corporations computing Montana source income in a tiered structure.
However, if one of the direct or indirect owners of a partnership is a C corporation, the operations of the partnership may be unitary with the C corporation.
See Corporate Income Tax for more information.
Guaranteed payments representing a return of capital are apportionable.
If the guaranteed payment stems from an item of nonapportionable income per the partnership agreement, and this income is allocated to Montana, then the guaranteed payment is Montana source income.
Payments made to a partner for services are considered nonapportionable income allocable to the state where the services were performed. Guaranteed payments must be included in the calculation of the federal self-employment taxes of the owner to qualify as guaranteed payments made for services rendered.
If any part of the guaranteed payment is compensation a nonresident partner for services performed in Montana, then that portion of guaranteed payment is Montana source income and must be reported on Column II of Montana Schedule K-1. If the guaranteed payment is paid to a resident of Montana for services rendered, the entire guaranteed payment is Montana source income and must be reported on Column I.
See ARM 42.9.303 for more information about sourcing guaranteed payments.
In general, disregarded entities must follow the same sourcing rules used by partnership and S corporations. However, because of the disregarded entities unique relation with their owner, specific rules apply based on the type of their owner.
There can be two types of disregarded entities owned by a partnership or an S corporation:
These entities determine their amount of gross income and Montana source income the same way partnerships or S corporations calculate their income.
This determination must be made before the pass-through owner determines the amount of Montana source income from its own trade or business.
A disregarded entity with Montana source income from activity in Montana must be included on List of Disregarded Entities (Form PTE, Schedule VII) of the owner's Form PTE.
A disregarded entity is a segment if:
Segments remain disregarded for the determination of Montana source income.
All their items or income, loss, deduction and credit remain in the apportionable income of their owner and their items of property, compensation or receipts are used in the determination of the apportionment factor.
Please Note:
If the partnership or the S corporation remains at risk based on a recourse debt related to a trade or business held in a disregarded entity holding functions or assets of such trade or business, the disregarded entity would still be considered a segment. If the debt is nonrecourse, such debt and its related expenses are automatically allocated to the entity holding the collateral.
If the disregarded entity is a segment and it carries on its own activities constituting a fully functioning and independent trade or business, the disregarded entity must complete the List of Disregarded Entities (Form PTE, Schedule VII) to determine the amount of Montana source income stemming from its own trade or business activities.
Items of income, (loss), deduction, credit or apportionment included in the segment are not reported on Schedule DE.
Disregarded entities owned by a C corporation are deemed unitary and must report their items of income, loss, deduction, credit, and apportionment on their owner's Corporate Income Tax Return.
Disregarded entities owned by resident individuals must report their items of income, loss, deduction and credit on their owner's federal Schedule C.
Disregarded Entities Owned by a nonresident individual, an estate or a trust must file Form DER-1 to report their Montana source income.
Form DER-1 includes Worksheet DE, that the disregarded entity may use to determine their Montana source income.
Pass-through income received by resident owners is Montana source income whether the entity carries on a trade or business in Montana.
Income sourced to Montana based on the residency status of the owner does not create a filing requirement for the pass-through entity. However, pass-through entities, including investment clubs, may still file an information return if they deem it necessary to provide Montana adjustments information to their Montana resident owners.
Partnerships formed by individual owners exclusively for the purpose of holding stock and securities, the so-called investment clubs, do not have a filing requirement.
The income is always sourced to the state of residence of owners because the income derived from such holding never relates to a trade or business.
This exemption to file does not extend to investment clubs that are corporations or trusts.
Guaranteed payments made to a retired partner are sourced to the state of residence of this partner.