A business entity, acting as an authorized agent, may choose to file a group non-resident return for certain non-residents. To participate, non-residents must receive distributive shares of income from business entities that derive income from CA sources, or that are doing business in California. The business entity pays tax on behalf of the non-resident taxpayers who elect to file a group return.

A group non-resident return is really a group of individual returns that meets the CA individual income tax return filing requirement. A qualified non-resident individual who elects to be included in the group non-resident return is not required to file a separate income tax return for the same tax year. Group non-resident returns may include less than two non-resident individuals. (FTB Pub. 1067)

If your clients filed as part of a group non-resident return, there are complex rules and requirements that often result in special handling. To expedite processing of these returns, follow these rules:

These individuals are subject to an extra 1% Mental Health Services Tax. Even so, non-resident individuals with more than $1 millions of California taxable income are eligible to be included in group non-resident returns. However, these individuals are subject to an additional 1% on their entire California taxable income when included in the group return. If each of these individuals filed their own return, only their taxable income in excess of $1 million is subject to the 1% surtax. So, these individuals should be made aware of this difference when making the election, which is irrevocable, to be included in the group return.

2. Must use a calendar year for the group non-resident return, even if the business has a fiscal year end., Any estimated tax payments must be made on a calendar-year basis.

3. Use FTB 540-ES to make estimated tax payments for the group non-resident return.

Estimate payments made for a non-resident group return must be made on FTB Form 540-ES. Please see the example in FTB Pub. 1067 for detailed instructions on how to complete the estimate voucher.

4. Use FTB Form 540NR - attach Schedule 1067A and signed FTB Form 3864.

The California Non-resident or Part-Year Resident Income Tax Return (Form 540NR) is required for filing a non-resident group return. The following FTB forms must be attached to the return:

o Schedule 1067A Non-resident Group Return Schedule

o Form 3864 Group Non-resident Return Election

An authorized general partner, member-manager, corporate officer, or an attorney-in-fact must sign FTB Form 3864. A new election form must be signed and attached each year.

5. Include only individuals in the group non-resident return.

Only individuals, not Partnerships, LLCs, C corporations, S corporations, Estates, or Trusts, are eligible to use a group return. There is an exception to this - grantor trusts, described under IRC Section 675-677, and not recognized as a separate taxable entity for income tax purposes.

In addition, the individuals must be full-year non-residents of California, and the only California source income must be from the business entity.

6. Election to be included in the group non-resident return is irrevocable.

Make sure you tell your clients that once a group return is filed, it cannot be amended to either include or exclude a non-resident individual.

7. Income is taxed at the highest marginal rate.

The income reported on a group non-resident return is taxed at the highest marginal rate, currently 12.3%.

8. Moving estimated payments

Use Schedule 1067B to authorize FTB to move estimated tax payments from either the group to the individual’s account, or the individual’s account to the group.

9. Elective Tax for Pass-Through Entities (PTE) and Credit for Owners

For taxable years beginning on or after January 1, 2021, and before January 1, 2026, California law allows an entity taxed as a partnership or an “S” corporation to annually elect to pay an elective tax at a rate of 9.3% based on its qualified net income. Then a credit is allowed against the personal income tax to a taxpayer, other than a partnership, that is a partner, shareholder, or member of a qualified entity that elects to pay the elective tax. Because this is a credit to the individual and not a credit to the entity then passed through to the individual, the credit is not considered a credit directly attributable to the entity and is not allowed by a partner/member/shareholder included on a group return (California Revenue & Taxation Code (R&TC) Section 18535(a))

10. FTB Pub. 1067 contains information regarding the Group Non-resident Returns.

11. Non-resident Aliens May Be Included (AB 2660) - For taxable years beginning on or after January 1, 2021, and until January 1, 2026, non-resident aliens receiving California source income may elect to be included on a group non-resident return filed by an authorized representative, in lieu of filing an individual non-resident return – even if the non-resident alien doesn’t have an SSN or ITIN. The tax rate(s) applicable to an electing non-resident’s taxable income for services performed in California would consist of the highest marginal rate, plus, if applicable to the electing non-resident, the additional mental health services tax, and no deductions or credits would be allowed. The 2021 Schedule 1067A, Nonresident Group Return Schedule was updated to allow electing nonresident aliens who do not have an SSN or ITIN to be included in a group nonresident return. As a result of the administrative burden in processing estimated tax payments for electing nonresident aliens, the FTB will not require estimated tax payments to be made for electing nonresident aliens included on a nonresident group return for the 2021 tax year. For more information, see the April 2021 edition of the FTB’s Tax News at: https://www.ftb.ca.gov/about-ftb/newsroom/taxnews/april-2021/index.html