PA Partnership Help Needed

[Lion EA]

Ex-client is a PA resident who was a partner in a NY partnership (brick & mortar bakery formerly in Hancock, NY). We filed Form 1065 and NY IT-24 and related forms and schedules, including Schedule K-1 and NY IT-204-IP. And for their personal joint return, Form 1040, NY IT-203, and PA 40 with related forms and schedules. Never in what the partners requested or my software diagnostics suggested since 2012 has PA asked for anything else. Now the remaining owner says she needs a 2020 PA Form pa20s-65 filed with PA. For 2020.

Should PA-20S/PA-65 been a part of their 2020 returns?

Do I need to prepare PA-20S/PA-65 for all years since 2012? Or from 2020 forward?

This is my ex-daughter-in law who owned a bakery with my son. Due to their divorce, 2021 was my last year preparing their returns. My son is no longer a partner in that bakery.

From at least 2012 through their 2021 returns, I prepared all the business and family returns for free.

All advice gratefully accepted.

[jklcpa]

Under what state laws/where was this parnership formed, actually a NY or PA partnership?  It makes a difference whether or not it was a domestic partnership (formed in PA) operating bricks/mortar store solely in NY, or was a foreign partnership to PA having no income from PA sources but with PA resident owner (foreign to PA = meaning a partnership formed in another state but operating within PA).

[jklcpa]

Just to be more clear, when reading the instructions for state forms such as this one, the terms "domestic" and foreign" refers to within or without of the state, not domestic or foreign in terms of the USA.

Form and its instructions are all in one document. Scroll down below form and see pg 2 of instructions "Who Must File"
https://www.revenue.pa.gov/FormsandPublications/FormsforBusinesses/Partnerships-S-Corps-LLCs/Documents/2022/2022_pa-20s-pa-65.pdf

[Lion EA]

It was a NY partnership. No PA income that year. (Hancock, NY, is on the PA border, so there were times over the past decade+ that they had catering income from PA.)

After the divorce, and after my time as their preparer, I think ex-DIL has been working out of her mother's inn/restaurant in PA. But, that's none of my business!

But in 2020, it "was a foreign partnership to PA having no income from PA sources but with PA resident owner (foreign to PA = meaning a partnership formed in another state but operating within PA)."

I'm in CT and have lots of NY clients (I'm also near a border, so commuters and a few residents) but my son, his then-wife, and the granddaughters were my only PA clients.

[Lion EA]

I called up the form/instructions as soon as I heard from her. I'm unclear whether only the PA-20S/PA-65 can be filed/mailed as a stand-alone form (it does have a signature block) or if they need a full partnership return when the partnership was not formed in PA and did not operate in PA. What I mean is, does this form flow from the Federal 1065 or from another PA partnership return?

By the way, this was a MMLLC taxed as a partnership.

(And, I do understand the use of "foreign" when used by states.)

[Lion EA]

Is this going to double their personal/joint return loss in PA, because they already reported the loss that flowed from the 1065 K-1 and the NY equivalent?

[jklcpa]

1 hour ago, Lion EA said:

Is this going to double their personal/joint return loss in PA, because they already reported the loss that flowed from the 1065 K-1 and the NY equivalent?

The partnership should have filed a PA-65 for any year that they EITHER had PA source income or had PA resident owners for this partnership. That is fairly clear in the "Who should file" section where it seems the partnership meets both the requirement to have had activity within PA during some years AND had PA resident owners. So, if they were PA residents the entire time this partnership existed since 2012, then the partnership should have filed for all of those years and should have also included either schedule RK-1 or NRK-1 depending on PA residency status.

It may or may not affect the personal return because PA rules for some deductions differ from the federal, and I am not sure how you would have addressed that without filing the PA partnership returns and allocations of income within and without.

Did the partnership register with PA to do business within the state?  Hopefully this isn't going to be the opening of a giant can of worms!  I can tell you a horror story from my earlier days in practice, not me personally but the firm I worked for. I am also on the border of PA, just west of Wilmington, DE, and I also have clients from all the surrounding states.

I'm curious how this came up. I'm sorry, is it because former DIL has a new preparer for 2023 that asked for the back year returns?

[Lion EA]

I believe, but do not know, that ex-DIL has had PA clients and is working out of PA since 2022, but she had her mother's preparer for 2022 and 2023. Apparently, she has some type of license that she needs to renew that she cannot until she files the 2020 Form PA-20S/PA-65.

CT has something similar, but it's only for CT partnerships/S-corporations to report to all its partners. Not for partnerships in other states to report to its CT partners. CT doesn't require a CT partnership return from a NY partnership; the income flows to the CT residents via their K-1s.

I guess it's the coordination with NY reporting that worries me. The partners receive Federal K-1s and NY IT-204-IP. Why would a NY partnership even have a PA ID from the PA DRS?

The partners already filed joint PA returns, as well as NY and Federal, with the bakery loss account for on their joint NY and Federal returns.

So do all the DE companies with partners and shareholders who live in PA but work only in DE have nexus in PA and have to file partnership and s-corporation returns in PA? PA is worse than NY and CA.

I had to fight CA years ago when CA said a CT partnership had CA nexus because a partner lived in CA. The partner had invested some monies to help the 95% partner start the CT company but never did any work in any state at any time for the partnership. We did win that battle and were NOT required to file CA partnership returns.

I'm not looking forward to doing more free work for my ex-DIL; her bookkeeping was a nightmare.

 

[jklcpa]

9 minutes ago, Lion EA said:

Why would a NY partnership even have a PA ID from the PA DRS

If the ptnrship delivered the goods or provided services within the state then it was conducting business within the state, and PA wants to know that and would issue a PA business license. I think catering service and/or food and beverage is subject to PA sales tax, but check on this to be sure. Was there employee involvement, possibly working an event, or just delivery of product? Maybe not, but asking to be thorough.

[Lion EA]

No business in PA through at least 2020. NYS only. Due to some paperwork she just sent me, it looks like she registered for PA sales tax 7/1/2021 with an Effective Date of 02/04/2022. Don't know if she had any catering contracted in PA coming up in 2021 or 2022, or if she was just preparing to file for divorce and would be working out of her mother's PA restaurant as the partnership by 2022. (She did stop getting W-2s from her mother's PA restaurant by about 2019, so she had about three years of zero income reported when she filed for divorce.) It's possible that the bakery had PA income in the second half of 2021 or in 2022. But not in 2020. As messy as her bookkeeping is, nothing for PA in her 2020 paperwork. I can prepare the PA form with zero PA income and use the reg # she obtained the following year and upload it on my portal for her to sign and mail to PA.

[jklcpa]

9 hours ago, Lion EA said:

I called up the form/instructions as soon as I heard from her. I'm unclear whether only the PA-20S/PA-65 can be filed/mailed as a stand-alone form (it does have a signature block) or if they need a full partnership return when the partnership was not formed in PA and did not operate in PA. What I mean is, does this form flow from the Federal 1065 or from another PA partnership return?

I just got back to the office and was looking over this thread to make sure all of your points were answered.

The PA-20S/PA-65 IS the main Pennsylvania partnership return.  If you aren't signing and e-filing as a paid provider/ERO and she is mailing it in, at a minimum the filing will require:

• Form PA-20S/PA-65
• PA Schedules RK-1s for each resident partner and NRK-1 for each nonresident partner. Like the federal, copies of these schedules are to be provided to each partner for use in preparing the individual PA return.
• PA-65 Schedule M - Reconciliation of Federal Income/Loss to PA Income/Loss
• Any other schedules that the PA20S/PA-65 line items requires, depending on activities for the year
• A complete copy of Federal 1065 and all of its attachments including the K-1s and 7004, if one was filed.

Sch M has its own set of instructions. This form "classifies" the income for PA purposes and then after that has sections for PA adjustments for items where rules differ from the Federal.  Just a couple of examples that many businesses have that differ for PA are bonus depreciation, meals & entertainment, gain on sale of an asset....

I'd suggest more closely reviewing the instructions for the PA20S/PA-65 form, especially beginning on page 5 under "What to File" and on page 7 for detailed instructions for "Assembling ..." that includes the order of attachments since this will be mailed in.

You are probably familiar with the PA rule differences from the federal, especially regarding depreciation since you handled the B&B on their personal return too.  Wasn't that a PA property too?  If you aren't and need an additional resource, you could start with the comprehensive PA PIT Guide for Pass-Thru Entities that has the rules for depreciation, when MACRS can be used and under which rules, bonus depreciation, and sec 179 rules for PA purposes.

Have I mentioned lately that I dislike PA returns?

 

Edited May 30, 2024 by jklcpa

[Lion EA]

It turns out the NY bakery had no PA income until the second half of 2021 when they earned $600. That's why we didn't file in PA for the partnership in 2020. We filed PA in 2021, and per ex-DIL her new preparer filed PA in 2022 and 2023. So far, PA has asked for only 2020. She was told the base form only and she can upload it for purposes of renewing her license (?) but to mail the return to PA also. I may do it by hand/on fill-in forms, because my biz returns are pay-per-return, and I'm not getting paid. (Yes, part of me wants to charge her, because it's not my fault and she/her mother got everything in the divorce -- house, car, daughters, child support, day care costs even though ex says she doesn't work, no holidays with the girls, his entire Roth, etc. -- but she's the mother of our grandchildren and has kinda kept communication open for the girls sake, or at least because we're now paying their day care and buy things at their school fundraisers!) I should be able to get to this next week.

Yes, they've been filing personal PA returns for years. And, had a LT rental house for a few years. I remember following the flow from Federal to PA, especially for depreciation. I've had a few other PA residents that I filed personal PA returns for, but no one other than my son currently and no other PA partnerships since 2021. This one really threw me, because the partnership didn't have any PA business until 2021, and that was the last year I was the partnership preparer. The partnership paid less than $36 in PA sales tax, but had strange quarters: November & December 2021 + January 2022 was due 2/22/2022. The partnership closed for the winter and didn't reopen until the spring, so that year-spanning quarter meant the income was reported in 2021, but the sales tax was paid in 2022. I really hate returning to prior years. I generally charge a premium.

Judy, I appreciate your time and research skills and advice and everything you do. A huge thank you! And, thank you to Dennis, too. And for anyone else who has followed my rant.