January 16, 2024
Montana water's-edge election due April 1, 2024, for calendar-year taxpayers
Calendar-year taxpayers that want to make a new Montana water's-edge election — or renew an existing election that expired at the end of 2023 — must file Form WE-ELECT by April 1, 20241 (instead of the March 31 deadline normally applicable in non-leap years).
Montana corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. Taxpayers that make a Montana water's-edge election pay an elevated tax rate of 7% instead of the standard 6.75% rate.
While many states require a water's-edge election to be made by the due date — or extended due date — of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the tax year in which it is intended to become effective.
The water's-edge election is only effective if all affiliated corporations subject to Montana tax consent, with consent by the common parent of an affiliated group deemed consent by all members of that group. A water's-edge group generally includes corporations organized in the United States that have a unitary relationship and are eligible to be included in a federal consolidated return, except that Montana substitutes a greater-than-50%-ownership test for the 80% federal test. Other affiliated corporations that may be included are domestic international sales corporations (DISCs) and foreign sales corporations (FSCs), export trade corporations, foreign corporations that derive gain or loss from real property interests in the United States, corporations incorporated outside the United States that have more than 20% of their average payroll and property assignable to a location inside the United States, and corporations organized in a "tax haven."2
Timely filed elections, if approved, are binding for three years, absent Montana Department of Revenue (MT DOR) permission to change the filing methodology. Taxpayers wishing to continue the election for an additional three years must file Form WE-ELECT within 90 days of the beginning of the new three-year period for which the election is intended to be effective. After an election is filed, the MT DOR will send a letter confirming the election has been approved or explaining why it was denied. The MT DOR typically responds to these requests quickly. If a reply is not received within two weeks of submission or within two weeks of the deadline, taxpayers should contact the MT DOR to ascertain if there is a problem with the request.
Montana's unique water's-edge election procedure is one of the missed state tax elections. Taxpayers seeking to make a water's-edge election for calendar-year 2024 must timely file by the statutory deadline using the state's TransAction Portal.
In our experience, the MT DOR will not waive untimely water's-edge elections unless the taxpayer can establish reasonable cause. Montana Administrative Rules Section 42.26.302 describes the procedures for obtaining relief from a late water's-edge-election filing, and Section 42.2.304(50) defines "reasonable cause."3 While Section 42.2.512 generally describes presumptions in favor of the collection of penalties and interest, it also provides examples of what may constitute reasonable cause. Satisfying any of the reasonable cause conditions is a difficult burden to meet, making timely filing of the desired election important.