When an S corporation has Minnesota-source income, shareholders generally must file a state tax return to report and pay tax on their share. See Individual Income Tax Instructions for details.
However, qualifying shareholders who don’t live in Minnesota – “nonresident shareholders” – may instead elect to have the S corporation report and pay composite income tax on their behalf. See “Reporting and Paying Composite Tax,” below.
To be included in the composite income tax, nonresident shareholders must not have any other Minnesota income beyond what they receive from the partnership or from other entities that can pay composite tax.
When determining composite income tax, only the current year's income is included. The S corporation is not allowed to reduce taxable income with the prior year's net operating loss.
Note: The S corporation is not required to withhold Minnesota income tax for nonresident shareholders who are included in the composite income tax. See Nonresident Withholding for S Corporations for more information.