On April 29th, 2019 Oklahoma Governor Stitt signed the Pass-Through Entity Tax Equity Act of 2019.
The Act allows pass-through entities (PTEs) to elect to pay Oklahoma income tax on its earnings. The Owner/Shareholders of these entities then exclude the Oklahoma source PTE income from their individual Oklahoma income tax returns.
The good news:
- The effect of the legislation is a work around to the federal limitation on state and local income tax (SALT) deductions under the TCJA of 2017.
- This provides an additional deduction for individual owners who do not itemize deductions.
- Federal taxable income is reduced by subtracting the tax expense, and the partner/shareholder does not report the income on his/her Oklahoma income tax return.
- Non-resident partner/shareholders are not required to file Oklahoma returns if the electing FTE is the only source of Oklahoma income.
- For an entity making the election for 2019, the tax is not due until the due date of the return (March 15, 2020).
Issues to consider:
- The entity must make an election to pay the tax at the entity level. To be effective for 2019, the election must be made by June 28, 2019.
- The US Treasury Department (IRS) has pledged to aggressively fight SALT deduction workarounds. In fact, proposed regulations were quickly issued to stop tax credits for “contributions” to state and local treasuries, another scheme designed to reclassify non-deductible taxes as charitable contributions. To date no such challenge has been lodged against state tax deductions for PTEs.
- Income attributable to individuals is subject to a 5% tax, whereas income allocable to owner/partners that are also pass-through entities will be subject to a 6% tax.
- Losses are not deductible against Oklahoma income in the current year. Losses are carried back or carried forward to another year.
- After 2019, estimated tax payments will be required by the entity.
- To claim a deduction on the federal return for 2019, cash basis entities must pay the tax before the end of 2019.
- A potential double tax for non-resident shareholders whose resident state taxes all income, then allows a credit for taxes paid to another state.
- These provisions do not apply to guaranteed payments to partners.
- The treatment of unreimbursed partner expenses has not been addressed.