Completing Schedule KS | Nonresident & Minnesota Shareholder Income Adjustment

Complete and provide Schedule KS to each nonresident shareholder and any Minnesota shareholder who has adjustments to income.

Purpose

An S corporation must provide each non-resident shareholder, and any Minnesota shareholder with adjustments to income, with enough information for them to complete a Minnesota income tax return and determine their correct Minnesota tax.

Schedule KS is used to provide shareholders with the information they need to file a Minnesota income tax return. The schedule shows each shareholder their specific share of the S corporation’s income, credits and modifications. Be sure to provide the shareholder a copy of both the front and back of the completed Schedule KS and the instructions.

If there are no modifications or credits and there are no nonresident shareholders, you do not have to provide Schedule KS.

You must enclose with your Form M8 copies of the Schedules KS and attachments issued to your shareholders and copies of your federal Schedules K and K-1.

If you are required to amend your federal S corporation return or you have been audit- ed by the IRS, you must file Form M8X and Schedules KS, if appropriate. See Reporting Federal Changes on page 3.

Line Instructions

Enter the name, address and identifying number of the shareholder. A $50 penalty will be assessed for each incorrect tax ID number used for a shareholder after being notified by the department that the number is incorrect.

JOBZ ID number. If the S corporation is a qualified business participating in a JOBZ zone, you must provide on each shareholder’s Schedule KS the assigned 10-digit JOBZ ID number through which the tax benefits are claimed. If you don’t know the JOBZ ID number, call the department at 651-556-6836.

Calculate lines 1–20 the same for all resident and nonresident shareholders. Calculate lines 21–35 for nonresident shareholders only.

Corporate Partners: When completing Schedules KS, be sure to include any amounts reported on the Schedule KPC you received as a partner of a partnership (include Schedule KPC with your return).

All Shareholders—lines 1–20

KS, line 1

Determine the interest you received from all non-Minnesota state and municipal bonds. Include the Minnesota portion of exempt-interest dividends if less than 95 percent

of the exempt-interest dividends are from Minnesota state and municipal bonds.

Enter the shareholder’s pro rata share of this amount on line 1.

KS, line 2

Determine the state income tax deducted in arriving at ordinary income or net rental income of the S corporation.

Do not include the minimum fee, the built-in gains tax, capital gains tax, LIFO recapture tax or excess net passive income tax in this amount.

Enter the shareholder’s pro rata share of this amount on line 2.

KS, line 3

Expenses or interest deducted on your federal return that relate to income not taxed by Minnesota must be added back to the shareholder’s Minnesota income.

Enter the shareholder’s pro rata share of any federal deductions that are attributable to income not taxed by Minnesota, other than U.S. government bond interest or other federal obligations.

If you had expenses attributable to interest or mutual fund dividends from U.S. bonds, see line 9 of Schedule KS. Do not include these expenses on line 3.

Enclose an explanation or statement showing your computation.

KS, line 4

If, during the year, your total investment in qualifying property was more than $200,000 or if you elected more than $25,000 in section 179 expensing, your shareholders must add back to Minnesota 80 percent of the difference between the expensing allowed for federal and for state tax purposes. Your shareholders will be allowed to subtract their share of the addition in equal parts over the next five years when they file their state tax returns.

If you completed federal Form 4562 to claim the section 179 expensing for federal tax purposes, you must also complete lines 1 through 12 on a separate federal Form 4562

(referred to as your Minnesota Form 4562 below), to determine the amount required to be added back for Minnesota purposes.

Recalculate line 12 of your Minnesota Form 4562 using the same information from your federal Form 4562 and the following modifications:

  • Subtract $475,000 from line 1 of your federal Form 4562, and enter the result on line 1 of your Minnesota Form 4562.
  • Enter line 2 of federal Form 4562 on line 2 of your Minnesota Form 4562.
  • Subtract$1,800,000fromline3ofyour federal Form 4562, and enter the result on line 3 of your Minnesota Form 4562.
  • Enter the information from lines 6 and 7
    of federal Form 4562 on lines 6 and 7 of your Minnesota Form 4562. However, if you have section 179 expensing from a flow through entity, use the amount from line 10 of Schedule KPC instead of the amount from line 11 of federal Schedule K-1.
  • Enter line 10 of federal Form 4562 on line 10 of your Minnesota Form 4562.
  • Recalculate lines 4, 5, 8, 9, 11 and 12 of your Minnesota Form 4562. The result on line 12 of Minnesota Form 4562 cannot be more than line 1 of that form.
  • Enter the shareholder’s pro rata share of the amount on line 12 of the Minnesota Form 4562 on line 4 of Schedule KS.

KS, line 5

If you chose on your federal return the special depreciation allowance for certain qualified property, your shareholders must add back 80 percent of the bonus depreciation to Minnesota.

Follow the steps below to determine the shareholder’s share to enter on line 5 of Schedule KS:

  1. Add line 14 and line 25 of
    your federal Form 4562 . . . . . . .
  2. total of any bonus depreciation amounts passed through to the S corporation as a partner of a partnership (from line 8 of Schedule KPC). . . . . . . . . . . . . . .
  3. Add steps 1 and 2 . . . . . . . . . . . .
  4. Multiply step 3 by the shareholder’s percentage of stock ownership . . . . . . . . . . . . . . . . . .

Enter the result from step 4 on line 5 of the shareholder’s Schedule KS.

Federal bonus depreciation subtraction.

For five years following the addback year, your shareholders may be able to subtract one-fifth of the addback on their Minnesota income tax return. See the instructions for Form M1 for details.

KS, line 6

If you are an employer who provides prescription drug coverage to your retirees, include on line 6 the shareholder’s pro rata share of the federal tax-exempt subsidies you received for continuing these pension benefits.

KS, line 7

Enter the shareholder’s pro rata share of any fines, fees and penalties that were deducted as business expenses paid to a government entity or nongovernment regulatory body as a result of a violation of law, or the investigation of any potential violation of law. This does not include amounts identified in a court order or settlement agreement as restitution or as an amount paid to come into compliance with the law.

KS, line 8

Leave this line blank. As of Dec. 1, 2011, there are no federal changes that have not been adopted by Minnesota.

KS, line 9

Interest earned on certain direct federal obligations is taxable on the federal return, but is not taxable on the state return.

Determine the net interest you received from primary obligations issued by the U.S. government, such as savings bonds and treasury notes, that are held directly by the S corporation. Do not include obligations where the U.S. government is only a guarantor. Be sure to subtract any investment interest and other expenses you deducted on the federal return that relate to this income.

Enter the shareholder’s pro rata share of this amount on line 9.

KS, line 10

Enter the shareholder’s pro rata share of the amounts from lines 17 and line 30 of Schedule JOBZ.

KS, line 11

Leave this line blank. As of Dec. 1, 2011, there are no federal changes that have not been adopted by Minnesota.

KS, line 12

Enter the shareholder’s pro rata share of the Employer Transit Pass Credit that is passed through to the shareholders.

KS, line 13

Enter the shareholder’s pro rata share of the Enterprise Zone Credit that is passed through to the shareholders.

KS, line 14

Enter the shareholder’s pro rata share of the 2011 credit for increasing research activities that is passed through to the shareholders.

If the business qualifies, the credit cannot be claimed by the S corporation and the full credit must be passed through to the shareholders.

KS, line 15

Enter the shareholder’s share of the Historic Structure Rehabilitation Credit based on the shareholder’s share of the S corporation’s assets, or as specifically allocated in the

S corporation’s organizational documents, as of the last day of the taxable year.

You must also include the NPS project number, which is provided on the credit certificate you received from the State Historic Preservation Office of the Minne- sota Historical Society when the project was completed and placed into service.

KS, line 16

Enter the shareholder’s pro rata share of the JOBZ Jobs Credit that is passed through to the shareholders.

KS, line 17

If, for regular tax purposes, you elected the optional 60-month write-off under IRC section 59(e) for all property in this category, skip lines 17–20. No adjustments are necessary.

Intangible drilling costs (IDCs) from oil, gas and geothermal wells are a tax preference item to the extent that the excess IDCs ex- ceed 65 percent of the net income from the wells. The tax preference item is computed separately for oil and gas properties and for geothermal properties.

Enter the shareholder’s pro rata share of the following: IDCs allowed for regular tax purposes under section 263(c), (but not including any section 263(c) deduction
for nonproductive wells) less the amount that would be allowed had the IDCs been amortized over a 120-month period starting with the month the well was placed in production.

KS, line 18

Gross income from oil, gas and geothermal properties are used in determining if the excess IDCs exceed 65 percent of the net income from the wells.

Enter the shareholder’s pro rata share of the aggregate amount of gross income within the meaning of section 613(a) from all oil, gas and geothermal properties that was received or accrued during the tax year.

KS, line 19

Deductions allocable to oil, gas and geo- thermal properties are used in determining if the excess IDCs exceed 65 percent of the net income from the wells.

Enter the shareholder’s pro rata share of any deductions allocable to oil, gas and geothermal properties. Do not include any deductions for nonproductive wells.

KS, line 20

In the case of oil wells and other wells of nonintegrated oil companies, enter the shareholder’s pro rata share of the amount by which the depletion deduction exceeds the adjusted basis of the property at the end of the tax year.

In computing the year-end adjusted basis, use the rules of section 1016. However, do not reduce the adjusted basis by the current year’s depletion. Figure the excess amount separately for each property. If the deple- tion deduction for any property does not exceed the adjusted basis at year-end, do not include a tax preference amount for that property.

Nonresident Shareholders—Lines 21–35

KS, line 21

The Minnesota source gross income is
used to determine whether a nonresident shareholder is required to file a Minnesota income tax return or has the option to elect composite income tax.

Enter the shareholder’s pro rata share of
the S corporation’s Minnesota source gross income. Minnesota source gross income is the total amounts apportioned to Minnesota that are included on line 6 of federal Form 1120S, and lines 17, 19 and 20a of Form 8825 and (other than losses), 3a, 4, 5a, 6, 7, 8a, 9 and 10 of Schedule K (1120S).

KS, lines 22–31

From the nonresident shareholder’s federal Schedule K-1 (1120S), enter the Minnesota portion of the amounts on lines 22 through 31.

On line 30, include any items from the Schedule K-1 that are not specifically la- beled on lines 22-29 and 31.

Line 31 refers to the Minnesota apportioned amount of federal section 179 expense from the federal Schedule K-1, not the amount calculated on line 4 for the Minnesota ad- dition.

All income of a Minnesota resident is taxed by Minnesota, regardless of the source.

Composite Income Tax and Nonresident Withholding

KS, line 33

When determining the shareholder’s share of the S corporation’s Minnesota source distributive income, you must make adjust- ments for any items you passed through to the shareholder on lines 1 through 11 of the shareholder’s Schedule KS.

Follow the steps below to determine line 33:

  1. The difference between the share- holder’s federal section 179 deduction from box 11 of
    federal Schedule K-1 (1120S) and line 4 of the shareholder’s Schedule KS . . . . . . . . . . . . . . . .
  2. Federal bonus depreciation amount from line 5 of the share- holder’s Schedule KS . . . . . . . .
  3. Add step 1 and step 2 . . . . . . . .
  4. Multiply step 3 by 80% (.80) . .
  5. Line 6 of the shareholder’s Schedule KS . . . . . . . . . . . . . . . .
  6. Add step 4 and step 5 . . . . . . . .
  7. Multiply step 6 by line 18 of M8A ………………….
  8. Combine lines 22–31 of the shareholder’s Schedule KS . . . .
  9. Combinestep7andstep8 …
  10. JOBZ subtraction from line 10 of shareholder’s Schedule KS .
  11. To the extent allowed by law, enter one-fifth of the shareholder’s share of the federal bonus depre- ciation that was added back in a year the shareholder elected to be included in composite income
    tax . . . . . . . . . . . . . . . . . . . . . . . .
  12. To the extent allowed by law, enter one-fifth of the shareholder’s share of the section 179 expensing that was added back in a year the shareholder elected to be included in composite income tax . . . . .
  13. Add steps 10, 11 and 12 . . . . . 14 Subtract step 13 from step 9 .

Enter the result from step 14 on line 33 of the shareholder’s Schedule KS. This amount is the shareholder’s adjusted Minnesota source distributive income.

KS, line 34

Composite Income Tax

Nonresident shareholders must pay tax if their Minnesota gross income is more than the minimum filing requirement for the year ($9,500 for 2011).

Skip this line if the nonresident shareholder did not elect the S corporation to pay com- posite income tax on his or her behalf.

To determine the amount of composite income tax to pay on behalf of each electing shareholder, follow the steps below:

  • Multiply line 33 of ScheduleKS by 7.85% (.0785) . . . . . . . . . .
  • Add lines 12 through 16of Schedule KS . . . . . . . . . . . . . .
  • Subtract step 2 from step 1 . . . .

The result in step 3 is the amount you are required to pay on behalf of the electing shareholder. Enter this amount on line 34 of the shareholder’s Schedule KS and check the box to indicate the shareholder’s election to be included.

If the shareholder elects to be included
in composite income tax but has zero tax due, enter zero on line 34. Even though the amount may be zero, be sure to check the box to indicate the election.

Once you have completed all the KS sched- ules for your electing nonresident share- holders, add the amounts on line 34 of all the schedules and enter the total on line 3 of Form M8. This is the amount of compos- ite income tax you are required to pay on behalf of your electing shareholders.

KS, line 35

Nonresident Withholding

Nonresident shareholders who are not included in the composite income tax may be subject to withholding. See Nonresident Withholding on page 3 to determine if your nonresident shareholders are subject to Minnesota withholding.

To determine the amount of tax to withhold for each nonresident shareholder, follow the steps below:

  1. Multiply line 33 of ScheduleKS by 7.85% (.0785) . . . . . . . . . .
  2. Add lines 12 through 16of Schedule KS . . . . . . . . . . . . . .
  3. Subtract step 2 from step 1 . . . .

The result in step 3 is the amount you are required to withhold from the nonresident shareholder, unless the individual submits Form AWC, Alternative Withholding Cer- tificate.

If the individual submits Form AWC, with- hold the amount from line 6 of the certifi- cate. Check the box provided on line 35 of the shareholder’s Schedule KS and also on line 4 of Form M8. Be sure to enclose a copy of the certificate when you file your return.

If the individual submits a false or fraudu- lent Form AWC, the department may require you to withhold the maximum percentage from that individual in the future, even if an exemption certificate is submitted.

Be sure to inform your shareholders that they must include their Schedule KS when they file their Form M1 to claim the Min- nesota withholding. If the schedule is not included, the department will disallow the withholding and assess the tax or reduce their refund.


This post is an excerpt from the Minnesota Department of Revenue’s publication, 2011 S Corporation Form M8 Instructions.