How to Complete Indiana Form IT-65 for Pass-Through Entities

Indiana Form IT-65 is used by pass-through entities, such as partnerships and S corporations, to report income, deductions, and other financial details to the state. Unlike traditional corporate tax returns, this form does not calculate a direct tax liability for the entity but instead passes income and tax obligations to individual partners or shareholders.

Filing correctly ensures compliance with Indiana tax laws and helps avoid penalties or processing delays. Understanding how to complete each section accurately can make tax season smoother for both the business and its owners.

Who Files the Form

Indiana Form IT-65 must be filed by pass-through entities that conduct business in the state or earn income from Indiana sources. This includes partnerships, limited liability companies (LLCs) taxed as partnerships, and S corporations. These entities do not pay income tax at the entity level but must report financial activity so that income, losses, and other tax attributes can be distributed to their owners.

Entities with Indiana-source income must file even if registered in another state. For example, an LLC formed in Illinois but generating revenue from Indiana clients must submit Form IT-65. Businesses with nonresident partners or shareholders may also need to withhold Indiana tax on their behalf to ensure compliance.

Failure to file can result in penalties, including a late filing fee of $10 per partner or shareholder, up to a maximum of $250. If taxes owed due to withholding requirements are not paid on time, interest accrues at the rate set by the Indiana Department of Revenue.

Key Sections for Pass-Through Entities

Completing Indiana Form IT-65 requires careful attention to sections that impact how financial information is reported and distributed. The entity must provide general identifying details, including its legal name, federal employer identification number (FEIN), and business activity code. Errors in this section can lead to processing delays.

The income section requires reporting total gross receipts and deductions, aligning with federal tax filings. While Indiana generally follows federal taxable income calculations, certain state-specific adjustments must be made. For example, Indiana does not allow deductions for state income taxes paid, which must be added back to taxable income. Additionally, income exempt at the federal level but taxable in Indiana, such as certain municipal bond interest, must be reported.

Pass-through entities must also disclose required withholding for nonresident owners. If an entity has partners or shareholders who do not reside in Indiana, it may need to withhold state income tax on their behalf. This is calculated using the composite tax rate, currently 3.15% for 2024, unless exemption documentation is provided.

Allocations of Income and Deductions

Distributing income and deductions among partners or shareholders depends on the entity’s governing documents, such as a partnership agreement or corporate bylaws. These agreements dictate how profits, losses, and deductions flow through to individuals, influencing their personal tax liabilities.

Indiana tax law follows federal principles regarding pass-through taxation, meaning income and deductions retain their character when passed to owners. If a partnership earns capital gains, those gains remain classified as such when allocated to partners, potentially affecting their eligibility for preferential long-term capital gains tax rates. Similarly, depreciation deductions or business interest expenses maintain their original classification. However, Indiana requires certain state-specific adjustments before final allocations are made. For instance, expenses disallowed at the state level, such as certain bonus depreciation deductions, must be recalculated to align with Indiana’s depreciation rules.

Multi-state operations add complexity when determining how much income is attributable to Indiana. The state uses an apportionment formula based on sales, property, and payroll factors to determine the portion of total business income taxable in Indiana. If a partnership operates in multiple states, only the Indiana-apportioned income should be allocated to resident and nonresident owners. Nonresident owners must receive detailed breakdowns of their Indiana-sourced income to ensure proper reporting on their home state returns and avoid potential double taxation.

Calculating Taxes Owed

Since pass-through entities do not pay income tax themselves, the focus is on ensuring that required withholding, composite tax payments, and nonresident partner obligations are correctly calculated. Indiana mandates that entities with nonresident owners either withhold tax on their behalf or file a composite return, which aggregates all such owners into a single tax filing. This simplifies compliance but means that individual owners included in a composite return forgo certain deductions and credits they might otherwise claim.

The composite tax rate in Indiana is currently 3.15% for 2024. This applies to each nonresident partner or shareholder’s Indiana-sourced income. For example, if a nonresident has $50,000 in taxable Indiana income, the entity must remit $1,575 on their behalf. Failure to withhold or pay composite tax can result in penalties, including interest charges on the unpaid balance.

Entities must also be mindful of estimated tax payment requirements. If total withholding or composite tax due exceeds $2,500 annually, quarterly estimated payments are required to avoid underpayment penalties.

Claiming Indiana Credits and Adjustments

Entities should review available credits and adjustments that can reduce the amount owed. Indiana offers various tax credits that pass-through entities can claim on behalf of their owners, potentially lowering their individual tax liabilities.

The Indiana Research Expense Credit allows businesses engaged in qualified research activities to offset a portion of their tax burden. This credit is based on federal research expenditures but requires a separate Indiana-specific calculation. Another frequently utilized credit is the Enterprise Zone Credit, which benefits businesses operating in designated economic development areas. Entities that make qualified investments or hire employees within these zones may receive a tax reduction.

Adjustments to taxable income may also be necessary based on Indiana’s tax laws. For example, certain federal deductions, such as those related to bonus depreciation, must be modified to align with state rules. Additionally, entities that receive income from tax-exempt bonds issued by Indiana municipalities may need to adjust their reported income. Properly applying these credits and adjustments ensures accurate tax reporting.

Submitting and Processing the Return

Once all calculations, allocations, and adjustments are finalized, the next step is submitting Form IT-65. Indiana requires electronic filing for most entities, streamlining the submission process. Businesses using professional tax software or working with a CPA can typically file electronically through the Indiana Department of Revenue’s INTIME portal, which also allows for payment processing and return tracking.

The deadline for filing Form IT-65 aligns with federal partnership and S corporation deadlines, typically March 15 for calendar-year filers. If additional time is needed, entities can request an extension using Form IT-6WTH, but this only extends the time to file, not the time to pay any taxes due. Late filings may result in penalties, including a $10 per partner or shareholder fee, up to a maximum of $250. If taxes are owed, interest accrues at the state’s annually adjusted rate.

Once submitted, the Indiana Department of Revenue processes returns and may issue notices if discrepancies are found. Entities should retain supporting documentation, including income statements, allocation schedules, and withholding records, in case of an audit or inquiry. If an error is identified after submission, an amended return may be required.

Amending a Previously Filed Form

If an entity discovers errors or omissions after filing Form IT-65, it must submit an amended return. Common reasons for amending include misreported income allocations, incorrect withholding amounts, or overlooked credits and deductions.

To amend, entities must complete a new Form IT-65 and check the box indicating it is an amended return. Any changes should be clearly documented, and supporting schedules must be included. If additional tax is owed due to the correction, payment should be remitted promptly to avoid interest charges. If the amendment results in an overpayment, a refund may be requested.

Entities should also notify affected partners or shareholders of any changes, as amended allocations may impact their individual tax filings. If the amendment affects composite tax payments or withholding, revised K-1 schedules should be issued to ensure owners report the correct amounts on their personal returns. Keeping detailed records of all amendments helps mitigate potential disputes with tax authorities.