Indiana Department of Revenue 
                 Indiana Government Center • 100 N. Senate Ave. Indianapolis, IN 46204 • dor.in.gov 
                 
Income Tax Information Bulletin  #72 

Subject:                 S Corporation, Trust, and Partnership Mandate to File a 
                         Composite Return on Behalf of Nonresident Shareholders and 
                         Partners 

Publication Date:        March 2024 

Effective Date:          Upon Publication 

References:              IC 6-3-2.1; 6-3-3-5; IC 6-3-4-12; IC 6-3-4-13; IC 6-3-4-15 

Replaces Bulletin #72, dated October 2023 

Disclaimer: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt 
is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any 
information that is not consistent with the law, regulations, or court decisions is not binding on either the department 
or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation 
and study of the current law and procedures related to the subject matter covered herein. 

Summary of Changes 
Apart from nonsubstantive, technical changes, this version of the bulletin has been changed to 
reflect that the $500 penalty for not listing all partners and shareholders on composite schedules 
will not be imposed for returns filed for taxable years that begin in 2023. In addition, this bulletin 
has been updated to clarify that if an owner is a resident of a reverse credit state that has a lower 
income tax rate than Indiana’s state income tax rate, withholding is required on the rate difference. 
Further, this bulletin has been updated to reflect that the state due date is one month from the 
federal due date, rather than 30 days, if the entity has a federal extension. Also, this bulletin has 
been clarified to provide that the extension safe harbor for 90% of the tax reasonably expected to 
be due applies to the combined withholding and pass through entity tax due rather than just the 
pass through entity tax. Finally, this bulletin has been updated to provide procedures for entities 
that have owners without a federal identification number. 

Introduction 

 NOTE: Due to the similar treatment of composite returns for S corporations, trusts, estates, 
 and partnerships, whenever this bulletin mentions “pass-through entity” or “owner,” it refers 
 to S corporations, trusts and estates, or partnerships and their shareholders, beneficiaries, or 
 partners, respectively. 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

Pass-through entities are required to file composite adjusted gross income tax returns on behalf 
of all nonresident owners with limited exceptions. Unless they have income from other Indiana 
sources, nonresident owners are then relieved of the obligation to file an individual adjusted gross 
income tax  return.  Corporate owners and other non-individual owners of a partnership,  S 
corporation, estate, or trust are still required to file returns. 

However, if the nonresident owner files an Indiana return, all Indiana income, losses, and other tax 
attributes must be reported on that return even if a pass-through entity files a composite return. 
For example, if an owner has $20,000 of income from a pass-through entity and $40,000 from an 
unrelated sole proprietorship, the owner must report all $60,000 of income. Any composite tax 
remitted by the pass-through entity is then treated as tax withheld on behalf of that owner. 

Further, in the event of loss or credit carryovers, the owner must file a return in order to claim the 
loss or credit and to properly use the credit. 

Income Inclusion for Pass Through Entity Tax and 

Withholding/Composite Tax 

For 2022, the income computation provided in the IT-20S and IT-65 instruction booklets and 
Schedule IN K-1 shall be used.  

Calculation for 2023 and simplified calculation for 2024 

For 2023, the income used for composite withholding will be the sum of Schedule IN K-1, Part 3, 
lines 1 through 11 minus lines 12, 13a, and 13b, plus any modifications listed in Part 4. The 
modifications for Part 4 shall be listed in the instruction booklet. However, for individual owners, 
the amounts allowable on Part 3, lines 13a and 13b are the amounts allowable in determining 
federal adjusted gross income. If the computed amount of income is less than zero, the amount 
is zero. 

If a nonresident individual owner is subject to a loss limitation (passive loss, at-risk loss, etc.), the 
owner must do one of the following: 

1. File a 2023 Form IT-40PNR. 
2. If no Form IT-40PNR for 2023 is filed, not claim any limited federal loss (other than losses 
   limited by basis limitations) on future Indiana tax returns that otherwise would have been 
   claimed on the 2023 IT-40PNR. For a partner in a partnership, claiming a deduction in this 
   situation will be considered an inconsistent reporting by the owner for purposes of IC 6-
   3-4.5. 

For 2024 and later, if a pass-through entity has actual knowledge that all (or substantially all) 
owners are not subject to federal passive or at-risk loss limitations, the income shall be computed 
in the same manner as the 2023 calculation with the following modifications: 

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1. If Part 3, line 8 and/or line 9 are less than zero, then line 8 plus line 9 cannot be less than 
   zero unless the pass-through entity has a net positive capital gain (without consideration 
   of any Section 1231 gain or loss). 
2. The Part 3, line 12 Section 179 modification shall be limited to the amount added back in 
   Part 4 (prior to any depreciation computed as part of the Indiana modification).  
3. For individual owners, the amounts allowable on Part 3, lines 13a and 13b are the amounts 
   allowable in determining federal adjusted gross income. Amounts allowable as itemized 
   deductions are not permitted to be taken into account. 

Standard method for 2024 and later 

For purposes of determining the income subject to withholding in 2024 and later, the following 
rules will apply as a general rule. Any references to line numbers are to the Schedule IN K-1.  

1. Ordinary income/loss from the pass-through entity that is attributed to the owner shall be 
   included. 
2. Other items of positive federal income shall be included. 
3. Guaranteed payments for partners shall be included. 
4. Capital losses shall be deductible only to the extent that either: 
        a. Capital losses do not exceed capital gains, or 
        b. In the case of a nonresident, either: 
                   i. Federal capital losses for the partnership do not exceed federal capital gains 
                       from the partnership; or 
                  ii. Indiana-source capital losses do not exceed Indiana-source capital gains. 
        c. A section 1231 loss shall not be considered a capital loss and a section 1231 gain 
           shall not be considered a capital gain. 
5. Loss items generally are permitted. However, if an entity has loss items that can be 
   considered passive for federal income tax purposes (Schedule IN K-1, Part 3, lines 2, 3, 10, 
   and 11), those losses are permitted as follows: 
        a. First, determine if the  pass-through  entity has  positive federal adjusted gross 
           income in aggregate for those lines. If yes, the losses are permitted in full. 
        b. Second, if the pass-through entity has negative federal adjusted gross income in 
           aggregate for those lines, determine if the pass-through entity has positive federal 
           adjusted gross income for each line individually. If the federal adjusted gross 
           income associated with the line is positive, the loss for that line is permitted in full. 
        c. Third, after applying (b), if ordinary income (Part 3, line 1) is positive, then the losses 
           for those lines are permitted to the extent of: 
                   i.  line 1, plus 
                  ii. The greater of any net Indiana modifications directly associated with the 
                       loss reported on those lines for the taxable year or $0. 
        d. Fourth, after applying (b), if ordinary income (Part 3, line 1) is zero or negative, then 
           the losses for those lines are permitted to the extent of the greater of any net 
           Indiana modifications directly associated with the losses reported on those lines 
           for the taxable year or $0. 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

6. The amount allowable as a deduction for Section 179 expensing shall be limited to the 
   Section 179 modification required to be listed in Part 4, prior to any allowance for 
   depreciation. 

For individual partners, shareholders, and beneficiaries, only deductions allowable in determining 
adjusted gross income will be allowed. The Indiana modifications to adjusted gross income that 
are permitted to both individual and corporate taxpayers under  IC 6-3-1-3.5  (including any 
modifications under IC 6-3-2) are permitted with the exception of modifications directly related 
to passive activities for which the entity has a loss and that, on net, would decrease adjusted gross 
income for the owner. 

Composite Return Limitations 
The following limitations and conditions apply to those owners included in a composite return.  

•  Any income for the owner shall be computed in the manner prescribed above. 
•  Any deduction required for interest disallowed under IRC Section 163(j) shall be permitted. 
   Any addback for the owner shall be determined as if the pass-through entity was the sole 
   source of the owner’s Indiana income. 
•  No credit carryforwards shall be permitted except to the extent specifically permitted in 
   the instructions for the relevant entity form (i.e., IT-20S, IT-41, or IT-65). For 2023, these 
   must be designated by the owner on Schedule COMP-A. 
•  No deduction shall be permitted for interest paid on investment indebtedness under IRC 
   section 163(d) (limitation on investment interest indebtedness). 
•  No deduction shall be permitted for net operating losses. 
•  No personal exemptions shall be permitted. 
•  No deduction shall be allowed for charitable contributions allowed or allowable pursuant 
   to Section 170 of the IRC. 
•  Any college credit for contributions is not permitted pursuant to IC 6-3-3-5.  
•  No credit shall be permitted unless the provisions of the credit specifically allow flow-
   through of the credit to owners. 
•  No credit is permitted for taxes paid to other states. 
•  Any refund of state or county taxes will be remitted directly to the pass-through entity. 

Special Note for Local Income Taxes 
As a general rule, withholding and remittance of local income tax for non-resident owners is not 
required. However, if a non-resident owner has a principal place of employment or self-
employment in an Indiana county on January 1, withholding of local income tax is required for the 
county of principal employment or business.  

Thus, for instance, if an individual has their principal place of employment in St. Joseph County on 
January 1, does not change their principal place of business or employment, and owns an interest 
in an S corporation doing business in both St. Joseph County and Elkhart County, the portion of 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

the S corporation’s income from St. Joseph County is subject to local income tax, while the portion 
from Elkhart County is not subject to local income tax. 

The requirement for reporting county tax for composite tax purposes shall begin for taxable years 
beginning after Dec. 31, 2019. However, this does not relieve the owner of the requirement to 
report county income tax on the owner’s return if the tax is otherwise required. 

If the individual has provided a Form WH-4 to the pass-through entity for employee withholding 
tax, the  pass-through  entity shall also use that information to determine the county  for 
nonresident withholding. Also, the owner may provide a Form WH-4 to corporation pass-through 
entity if the pass-through entity does not have a form on file. 

If an individual owner is subject to Indiana local income tax, the individual must file Form IT-
40PNR. 

Special Rules for Part-Year Residents 
If a pass-through entity has an individual that was a resident for part of the taxable year and was 
a nonresident for part of the taxable year, the pass-through entity shall withhold tax on: 

(1) the entire portion of the distributive share earned while an Indiana resident, plus 
(2) the Indiana portion of the distributive share earned while a resident of another state or 
    country. 

As a general rule, for a pass-through entity, the share attributable to each portion of the year 
should be prorated by day. For an estate or a trust, the share attributable to each portion should 
be determined on the day a distribution is made or deemed to be made. However, if a pass-
through entity can establish a different attribution (e.g., a seasonal business), the pass-through 
entity may use the different attribution. In addition, if the pass-through entity cannot divide the 
owner’s income, the entity can treat the owner as a full-year nonresident. 

In addition, if the individual was a resident of an Indiana county on January 1, the entire distributive 
share is subject to local income tax. If the individual was a resident of a county outside Indiana on 
January 1, the distributive share is not subject to income tax except as specifically provided in this 
bulletin.  

Composite Filing Procedures 
The following procedures must be followed by S corporations, partnerships, trusts, and estates 
filing composite returns: 

(1) If the entity either has elected to be subject to pass through entity tax (PTET) or is passing 
    through PTET paid by another entity and the entity’s PTET for each owner required to be 
    listed on Schedule Composite is greater than the state tax  computed on Schedule 
    Composite, you may check the box on Schedule PTET to not file a composite return. 
    Schedule PTET will serve as the composite return. This also applies to the requirement to 
    file Schedule Composite-COR, if PTET is indicated.  

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

    However, you must file Schedule Composite if any nonresident owner is subject to county 
    income tax. In addition, you must file Schedule Composite and/or Schedule Composite 
    COR if the state composite tax computed would exceed the PTET paid for any nonresident 
    owner except for the application of an exception code. 
     
    The requirements to file Schedule Composite and Schedule Composite-COR are 
    determined separately for each schedule. In other words, a pass-through entity may be 
    permitted to not file  a  Schedule Composite  but may be required  to file a  Schedule 
    Composite-COR.  
     
(2) For withholding on non-corporate entities (individuals, trusts, and other pass-through 
    entities, including S corporations), complete the Schedule Composite and set out the 
    calculation of tax attributable to each nonresident shareholder. Indicate the names of all 
    nonresident shareholders required to be included in the composite return. For nonresident 
    C corporations, use the Schedule Composite COR and include similar information. 
     
    For a corporate entity, the entity should be treated (1) as a C corporation unless the entity 
    responsible for withholding knows that the corporation is an S corporation and (2) for 
    purposes of any foreign source dividend deduction, be treated as an S corporation unless 
    the entity responsible for  withholding  knows  that  the  corporation  is a  C  corporation. 
    Withholding for  C  corporations  is required  at  the C corporation  tax  rate  (or financial 
    institutions tax if the corporation is subject to that tax) unless the corporation generally is 
    not subject to tax (e.g., a charitable organization)            and the income is known to not be 
    unrelated business income.  
     
    A partnership may rely on the good-faith representation of a corporate entity with regard 
    to whether the corporation is a C corporation or an S corporation, and as to whether a 
    non-profit can treat income as unrelated business income. 
     
    Subject  to  the  limitations  above,  separately  compute  the  Indiana  tax  liability  of  each 
    nonresident owner. Enclose these composite schedules with the S Corporation Income Tax 
    Return (Form IT-20S), the Partnership Return (Form IT-65), or the Fiduciary Income Tax 
    Return (Form IT-41).  
     
    If the entity is reporting PTET for an owner, the Indiana tax liability for each nonresident 
    owner is reduced by the amount of PTET reported for that owner. PTET cannot reduce 
    Indiana county tax liability. 

NOTE: For a partnership or S corporation, composite income means each nonresident owner’s 
distributive share of income, as determined above. 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

    A  pass-through  entity  is  not  required  to  include  a  publicly  traded  partnership  in  the 
    composite return if the publicly traded partnership is qualified under Section 7704(c) of 
    the Internal Revenue Code and has agreed to file an information return listing the name, 
    address, and taxpayer identification number for each unit. 

    Publicly traded partnerships are not required to withhold or file composite returns for their 
    partners. 

    S corporations are not required to list nonprofit corporations on Schedule Composite. 

(3) Enter the total tax liability on Form IT-20S, IT-41, or IT-65 of those nonresident owners 
    included in the composite return. Enter this amount on the line for total composite tax. 
    Any nonrefundable credits permitted to be used on the composite return and allowed to 
    be  passed through may  be  used  to  reduce  the  reported  composite  tax  due  amount. 
    Nonrefundable credits are not permitted against PTET. 
     
(4) Insert the total amount paid with Form IT-6WTH on behalf of the nonresident owners 
    included in the composite return, on the line for total IT-6WTH payments. Do not include 
    amounts to be paid with the filing of the IT-20S, IT-65, or IT-41 as payment of composite 
    tax due. This line is also used for reporting PTET payments. If you are reporting both PTET 
    and composite withholding, the amounts will be combined. 
     
(5) Any balance due or overpayment reported as a result is to be remitted by or refunded to 
    the pass-through entity. 

If there is a reason for not withholding or withholding a reduced amount on a partner, shareholder, 
or beneficiary, indicate the applicable exception code on the Schedule Composite or Schedule 
Composite-COR. These exceptions must be determined on a recipient-by-recipient basis. Please 
see the instructions for Schedule Composite or Schedule Composite-COR for the relevant codes.  

Composite Withholding Payments (Form IT-6WTH) 
Amounts withheld from nonresident owners included in the composite return should be remitted 
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with Form IT-6WTH. Payment is due the 15  day of the fourth month following the close of the 
pass-through  entity’s tax period. Multiple payments and IT-6WTH vouchers may be filed 
throughout the tax year or during the extension period. If additional payments are necessary, 
remit using the department’s online e-services portal, the Indiana  Taxpayer Information 
Management Engine (INTIME), which can be accessed at intime.dor.in.gov.  

The pass-through entity filing a composite return for the nonresident owners is liable for the tax 
shown on the return and for any additional tax, interest, and penalty as a result of a subsequent 
audit and examination. However, for taxable years beginning in 2023 and earlier, if an owner has 
a zero or negative income after modifications, do not include the owner on a composite return 
unless you are reflecting pass through entity tax that is credited to the owner. A penalty of $500 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

is imposed on a partnership or S corporation that fails to file a composite return for all nonresident 
owners.  

If the composite return otherwise would include an owner with zero or negative income after 
modifications, the penalty is subject to waiver if all other nonresident owners with positive income 
after modifications are included. However, the pass-through entity must demonstrate that they 
did not list the owner because of the owner’s zero or negative income after adjustments.  

Starting with the 2024 tax year, the composite return filed on paper must include nonresident 
owners with zero or negative income after modifications. Failure to include nonresident owners 
will be subject to a $500 penalty. The failure to include nonresident owners with zero or negative 
income will not  be subject to penalty for taxable years  that begin during  2023. However, 
composite returns will be subject to penalty for failure to include nonresident owners with zero 
or negative income after modifications starting with taxable years that file a return for tax year 
2024 or later. 

A Schedule IN K-1 still must be provided to the owner and to the department for all owners even 
if the owner has a negative income after adjustments. In addition, failure to remit the composite 
tax due with the pass-through entity’s return may result in a 20% penalty of the tax not remitted 
by the pass-through entity, even if the tax is remitted by the owners. 

The composite return shall be due with the pass-through entity’s return. If the IRS allows the pass-
through entity an extension to file its federal income tax return, the corresponding due dates for 
its Indiana income tax returns are extended automatically for the same period, plus one month. 

If a pass-through entity makes a payment in intended compliance with PTET but does not make 
a PTET election, those payments will be recharacterized as withholding tax payments. 

Withholding  on Nonresident Individual Partners  and 

Shareholders Who Are Domiciled in a Reverse Credit State 
A partnership is required to withhold on distributions or amounts  credited to nonresident 
partners. S corporations are required to withhold on distributions or amounts credited to 
nonresident shareholders. The partnership or S corporation becomes liable to the State of Indiana 
for the payment of this tax and must report it as statutorily required. The nonresident partner or 
shareholder must file the appropriate tax return to claim credit for the taxes withheld.  

A unique situation occurs when a nonresident individual partner or shareholder is domiciled in a 
reverse credit state with a higher tax rate than Indiana’s. These individuals may claim credit on 
their Indiana nonresident return for taxes paid to their state of domicile on Indiana source income. 
Since the domiciliary state imposes a higher tax rate, such individuals will normally not owe any 
tax to the State of Indiana.  

The  withholding  of  taxes  as  described  in  this  section  of  the  bulletin  is  not  required  when a 
nonresident individual partner or shareholder is domiciled for the entire year in a reverse credit 
state when a higher tax rate than the tax rate in effect in Indiana for that tax year and the Indiana 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

source income is actually taxed in the domiciliary state. If the tax rate in the domiciliary state is 
lower than Indiana’s tax rate, the withholding is the difference between Indiana’s state tax rate 
and the domiciliary state’s tax rate. 

Special Rules for Owners Without a Federal Identification 

Number 
If an owner does not have an FEIN, an Individual Taxpayer Identification Number, or Social Security 
Number, you are required to list the owner on the composite return. For 2023, you will be required 
to: 

    1. List the owner without a federal ID number, leaving the federal ID column blank; 
    2. List the owner’s state of residence as “FC”; and 
    3. File any Schedule IN K-1s on paper. If applicable, the $10 penalty per paper K-1 will not 
        be due under this circumstance. If the penalty is imposed, contact the department at (317) 
        232-0129 for waiver of the penalty.  

Safe Harbor Provision 
A partnership or S corporation will not be penalized for failure to pay the full amount of composite 
withholding tax shown on the return or to pay the deficiency of the PTET due if the partnership 
or S corporation pays the department at least 80% of the combined PTET and composite 
withholding tax due for the current year or  100% of the combined  PTET and composite 
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withholding tax due for the preceding year before the 15  day of the fourth month after the end 
of the partnership or S  corporation’s taxable year. However, if the remaining unpaid tax and 
interest is not remitted by the extended due date for the partnership or S corporation return, late 
payment penalties may be assessed on the unpaid balance. 

A partnership or S corporation permitted an extension of time to file its income tax return under 
IC 6-8.1-6-1 will be granted the same extension for composite withholding tax. However, in order 
to qualify for penalty relief, the partnership or S corporation is required: 

    (1) to meet the safe harbor provision set forth in the section or otherwise pay 90% of the 
        combined PTET and composite withholding tax reasonably expected to be due by the due 
        date of the pass-through entity return prior to any extension; and  
    (2) to remit any unpaid tax and interest by the extended due date. 

An extension does not relieve the pass-through entity for interest on any unpaid tax or penalty 
except as specifically provided by law. 

If  you  have  any  questions  concerning  this  bulletin,  contact  the  Tax  Policy  Division  at 
taxpolicy@dor.in.gov. 

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Indiana Department of Revenue • Income Tax Information Bulletin #72 

Robert J. Grennes, Jr. 
Commissioner 
Indiana Department of Revenue 
 
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