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:        October 2023 

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 February 2020 

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 all partners and shareholders must be listed on composite schedules beginning in 
2023 at the risk of $500 penalty. In addition, this bulletin has been changed to provide an updated 
computation  of  adjusted  gross  income  for  2024  and  later  and  to  clarify  the  allowance  of 
carryforward credits.  Finally, this bulletin has been changed to provide guidance for the interplay 
of pass through entity tax, to clarify guidance concerning the treatment of part-year residents, 
incorporate information previously found in Tax Policy Directive #5, and additional information 
concerning new codes added to relevant form instructions. 

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. 

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 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

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 

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).  

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

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, 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. 
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. 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

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 
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. 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

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 
        eligible  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. 

        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 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

        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 
with Form IT-6WTH. Payment is due the 15 thday 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, if an owner has a zero or negative income after modifications, 
do not include the owner on a composite schedule unless you are reflecting pass through entity 
tax that is credited to the owner. A penalty of $500 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 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

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. 
Additionally, the pass through entity must provide the relevant information for such excluded 
owners upon request.  

Starting with the 2023 tax year, the composite return must include nonresident owners with zero 
or negative income after modifications.  Failure to include nonresident owners will be subject to 
a $500 penalty. 

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 schedule 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 30 days. 

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 
source income is actually taxed in the domiciliary state.  

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 

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Indiana Department of Revenue  •Income Tax Information Bulletin #72 

withholding  tax  due  for  the  current  year  or  100%  of  the  combined  PTET  and  composite 
withholding tax due for the preceding year before the 15 thday 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 PTET 
        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. 

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