The State of New Mexico requires pass-through entities (which may be a state law partnership or a limited liability company taxed as a partnership) to withhold tax at 5.9% on earnings of non-resident partners or members if the owner’s distributive share of net income is over $100 in a year. As a result of engaging in activity in New Mexico, each owner generally must also file a New Mexico return reporting this activity. Historically, New Mexico has not allowed pass-through entities to file composite tax returns but see the discussion about a recent law change below.
If a non-resident owner chooses, the pass-through entity may agree with the owner that the owner pays the amount that would have been withheld and remitted to the New Mexico Taxation and Revenue Department (Revenue Department) on behalf of the owner by the pass-through entity. To document this election, the owner and pass-through entity must have Form RPD-41353, Owner’s or Remittee’s Agreement to Pay Withholding on Behalf of Pass-Through Entity or Remitter, retained in their records. Note, that this form does not need to be filed with the Revenue Department.
Other exceptions that may exempt pass-through entity withholding include but are not limited to owners that:
Withholding payments are due two months and 15 days after the taxable year-end (March 15 for calendar year taxpayers). No estimated payments are required for New Mexico withholding. If payments are not remitted by the due date, interest and penalty may apply until the payment is received by the Revenue Department.
The pass-through entity must file Form RPD-41367, Pass-Through Entity Withholding Detail Report, due the same day as the New Mexico state income tax return. The form may be extended for six months if there is a valid federal or state extension. Note, withholding payments are not extended, however, penalties are waived through the extension date.
Alternatively, effective on January 1, 2022, pass-through entities may file a composite tax return for electing non-resident owners. See NMSA 1978 § 7-3-14. Eligibility to take part in this filing program is similar to the above-mentioned agreement between a non-resident owner and a pass-through entity to reassign withholding responsibility.
New Mexico is not the only state imposing entity-level withholding on non-resident owners of pass-through entities, as Oklahoma, Colorado, California, and Pennsylvania are other oil-producing states with similar requirements. We ask clients to work closely with us during the year to timely identify situations that could cause withholding requirements to commence, through changes in the location of activity or makeup of the ownership group.