(1) The following computations must be made separately for each state or foreign country's income tax with respect to which a credit is claimed:

(a) if the claim for credit does not include the taxpayer's share of income tax paid to another state or country by an S corporation in which the taxpayer is a shareholder:

(i) determine the amount of income from the other state or foreign country that is included in Montana adjusted gross income, but do not include income that is exempt in Montana;

(ii) determine the amount of tax paid to the other state or foreign country on income that is not exempt in Montana by multiplying the tax paid to the other state or foreign country by a fraction, the numerator of which is the amount of income from the other state or foreign country that is included in Montana adjusted gross income (excluding income exempt in Montana) , and the denominator of which is the total amount of income from the other state or foreign country (including income exempt in Montana) ; and

(iii) multiply Montana income tax liability, as determined without the credit, by a fraction, the numerator of which is the taxpayer's income from the other state or foreign country included in the taxpayer's Montana adjusted gross income, and the denominator of which is the taxpayer's total Montana adjusted gross income.

(b) the allowable credit is the lower of the:

(i) amount of income tax paid to the other state or foreign country;

(ii) amount of the income tax paid to the other state or foreign country on income that is not exempt in Montana, the result of the calculation in (1) (a) (ii) ; or

(iii) proportionate amount of the Montana income tax attributable to income paid to the other state or foreign country, the result of the calculation in (1) (a) (iii) .

(2) If the claim for credit does include the taxpayer's pro rata share of income tax paid to another state or country by an S corporation or the distributive share stated separately or non-separately of income taxes paid by a partnership, which is to another state or foreign country, on income which is subject to Montana income tax:

(a) increase the Montana adjusted gross income for the tax year the entity paid the income taxes by the share of the entities deduction for taxes paid to the other state or foreign country for which the entity intends to claim the credit;

(b) calculate the Montana income tax liability taking the increase in Montana adjusted gross income into account;

(c) determine the share of the amount of net entity income that is included in Montana adjusted gross income (do not include income that is exempt in Montana) ;

(d) determine the share of the amount of income tax paid to the other state or foreign country by the entity on income that is not exempt in Montana by multiplying the share of the amount of tax paid to the other state or foreign country by the entity by a fraction, the numerator of which is the share of the amount of the entity's net income included in the Montana adjusted gross income (excluding income exempt in Montana) , and the denominator of which is the share of the total amount of the entity's net income (including income exempt in Montana) ; and

(e) multiply the recalculated Montana income tax liability by a fraction, the numerator of which is the taxpayer's share of income of the entity included in the taxpayer's Montana adjusted gross income, adjusted as provided in (2) (a) , and the denominator of which is the taxpayer's total Montana adjusted gross income, adjusted as provided in (2) (a) .

(3) The credit allowable is the lower of:

(a) the share of the amount of income tax paid by the entity to the other state or foreign country;

(b) the share of the amount of the income tax paid to the other state or foreign country by the entity on the share of income that is not exempt in Montana, the result of the calculation in (2) (d) ; or

(c) the proportionate amount of the Montana income tax attributable to the share of income of the entity paid to the other state or foreign country, the result of the calculation in (2) (e) .

(4) Examples of how to calculate these credits paid to another state or country are:

(a) Example 1 - Taxpayer, a full-year Montana resident, sold real property in Idaho in 2002. Idaho does not provide nonresidents a credit for income earned in that state if that income is taxable in another state. In 2003, the taxpayer was legally required to, and did, file a 2002 Idaho income tax return reporting the transaction and paying Idaho an income tax of $700. The taxpayer's $5,000 gain on the sale of the Idaho property was included in the taxable income reported on the 2002 Montana income tax return. The taxpayer's 2002 Montana income tax liability was $3,400. The taxpayer's total 2002 Montana adjusted gross income was $23,000, which included the $5,000 gain. The taxpayer calculates the amount of credit the taxpayer may claim against the 2003 Montana income tax liability as follows:

 

     $3,400 x $5,000 / $23,000 = $739

 

Montana income tax liability multiplied by taxpayer's income from the other state or foreign country included in the taxpayer's Montana adjusted gross income divided by taxpayer's total Montana adjusted gross income. Lower of tax paid ($700) or result of calculation ($739) = $700. The taxpayer may claim a credit of up to $700 against the 2003 Montana income tax liability.

(b) Example 2 - Taxpayer, a full-year Montana resident, was a shareholder in an S corporation that was engaged in banking in State X in 2002. State X does not allow S corporations engaged in financial businesses to elect state-level S corporation treatment and imposes a tax on them measured by net income. The following represents what occurred:

(i) The S corporation was required to and did file a 2002 income tax return with State X in 2003 and paid a tax measured by its net income of $132,000, $121,000 by estimated payments made in 2002 and the balance of $11,000 in 2003 when it filed its 2002 return;

(ii) The S corporation paid $15,000 tax to State X for tax year 2001 when it filed its 2001 return in 2002. The S corporation's non-separately stated and separately stated items for tax year 2002 were as follows, of which the Montana resident shareholder's share was 10%:

(A) An ordinary income of $2,000,000 from banking business includes a deduction of $136,000 for Minnesota taxes paid in 2002, $121,000 for estimated payments in 2002, and $15,000 for 2001 taxes paid in 2002;

 

     Tax exempt interest income                                                                    $1,200,000

     Ordinary dividends                                                                                         300,000

 

(B) The taxpayer's total 2002 Montana adjusted gross income (AGI) was $500,000, which included 10% of the S corporation's ordinary dividends, or $30,000, and 10% of the ordinary income from its banking business, or $200,000;

(C) The shareholder's $200,000 share of the S corporation's ordinary income from its business was reduced by the shareholder's share of the S corporation's deduction for $136,000 income taxes paid to State X in 2002, or by $13,600 (had the shareholder paid the shareholder's 10% share of the Minnesota taxes rather than the S corporation, the shareholder's 10% pro rata share of the S corporation's ordinary income for 2002 would have been $213,600) ;

(D) The shareholder's 10% share of the S corporation's tax-exempt interest, or $120,000, is exempt from Montana individual income tax and is not subject to tax by both State X and Montana; and

(E) Assume the taxpayer's 2002 Montana tax liability would be $50,000 if the credit were not claimed;

(iii) The taxpayer calculates the Montana income tax liability and the amount of credit the taxpayer may claim against the 2002 income tax liability as follows:

(A) The taxpayer's Montana taxable income is increased by the pro rata share of the S corporation's deduction for State X taxes paid for which the taxpayer claims the credit;

 

     Montana AGI:                                $500,000

     Reverse deduction:                           13,600

     Adjusted MT AGI:                            513,600

 

(B) The taxpayer's Montana income tax liability is recalculated. Tax on adjusted Montana AGI of $513,600:  $56,500 (assumed result) . The taxpayer's pro rata share of the amount of net S corporation income that is included in Montana adjusted gross income is determined and the pro rata share of the S corporation's income tax paid allocated to income taxed in Montana:

     Ordinary income from banking operations                        $200,000

     Ordinary dividends                                                                    30,000

     S corporation income exempt from Montana tax                 120,000

 

     Pro rata share of S corporation tax:

 

     $13,600 x $230,000 / $350,000 = $8,937

 

(C) The recalculated Montana income tax liability ($56,500) is multiplied by the ratio of S corporation net income included in Montana AGI, increased by the pro rata share of the S corporation deduction for the income taxes paid ($200,000 + $30,000 + $13,600 = $243,600) to the taxpayer's total adjusted gross income, increased by the pro rata share of the S corporation deduction for income taxes paid ($513,600) .

 

     $56,500 x $243,600 / $513,600 = $26,824

 

(D) The allowable credit is $8,937, the lower of:

(I) pro rata share of the income tax paid by the S corporation, $13,600;

(II) pro rata share of the amount of the income tax paid to the other state or foreign country by the S corporation on their pro rata share of income that is not exempt in Montana, $8,937; and

(III) proportionate amount of the Montana income tax attributable to their pro rata share of income of the S corporation paid to the other state or foreign country, $26,824.