| ID | Status | Date | Public/Private | Industry | AHACPA Contact |
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| #15015 | Closed | public | _General | _General Support |
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Good morning, I’m working with a client that has some non-resident partners for the state of Virginia. The state of Virginia requires the partnership to pay taxes on behalf of non-resident partners. These are usually treated as distributions to the partners out of surplus cash. Usually what happens is the partnership will pay the taxes in May and withhold cash distributions to those partners when general distributions are made out of surplus cash later in the year to make the distributions equitable. However, no distributions were able to be made out of surplus cash in 2020 because there was no surplus cash during 2020. The partnership still paid the non-resident taxes in May of 2020 for the 2019 tax year. What is the best way to report this? Should it be a distribution, a receivable from the shareholders, or something else entirely? Is this a finding that will need to be documented? Thank you so much for your guidance! |
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If the taxes cannot be described as project-related, then they have to be paid from surplus cash. Accordingly, absent surplus cash, partners should put money in to pay those taxes. Payment from the project is a violation with the type pf reporting subject to materiality. The only way around this is to determine that the tax is in reality paid from the project. That does not sound likely in this case. Les Sparks AHACPA (801) 547-0809 |
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Thank you Les! So even though state law requires this to be paid, that has no bearing on the surplus cash requirement? It seems to me the HUD rules are in direct conflict with the state tax law. In such situations, I was under the impression the state law would overrule the HUD rules. Is this interpretation correct? If it is not correct, do you suggest the partners refund the partnership for the tax payments made? Is this a finding that will need to be reported on the audited financial statements and REAC? Thanks again for your help with this matter! |
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State law does not trump HUD requirements. Many states have similar taxes. Very few are actually a partnership/project tax. Most are taxes on the partners. Such taxes cannot be paid from project funds. HUD has been fairly consistent with that. The exception is the situation where we can prove that, based on the wording in the law, the tax is actually a project tax. That is rare. Whether this is a finding is really just a matter of materiality to determine the method of reporting. I reviewed the Virginia guidelines on this tax, it is clear that the tax is a tax on partners. Therefore, those taxes cannot be paid from project funds. HUD has been clear that such payments are not project expenses. It is noncompliance. How you report it, is simply a matter of materiality. Les Sparks
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