13 May 2019 Oklahoma law allows pass-through entities to elect to be taxed at the entity level in response to federal SALT deduction limitation; 2019 election must be made soon On April 29, 2019, Oklahoma Governor Kevin Stitt signed into law the Pass-Through Entity Tax Equity Act of 2019 (Act) (HB 2665), which allows a pass-through entity (PTE) filing returns in the state to elect to pay Oklahoma income tax at the entity level on behalf of its equity owners. The election can be made by any entity1 required to file an Oklahoma partnership income tax return or an Oklahoma S corporation income tax return and is available for tax years beginning on or after January 1, 2019. The election, once made, is binding until revoked under procedures to be set forth by the Oklahoma Tax Commission (Commission). The PTE tax equals the aggregated tax amount for all the PTE's members for the tax year in which the election is made. For each member of an electing PTE, the PTE will calculate the tax at either 6% or the highest marginal Oklahoma personal, trust or estate income tax rate, depending on the type of member (e.g., C corporation or individual). Specifically, for each member of an electing PTE, the PTE will multiply the member's Oklahoma distributive share of the electing PTE's Oklahoma net entity income tax for the tax year by:
If the PTE election results in a net entity loss for Oklahoma income tax purposes, the electing PTE can carry it back or forward. The PTE tax is due and payable when the electing PTE must file its income tax return; estimated tax payments are required for tax years beginning on or after January 1, 2020. A nonresident individual member of an electing PTE is not required to file an Oklahoma income tax return if the nonresident individual's only Oklahoma source of income for the tax year is from one or more electing PTEs that file and pay the tax due. The Commission will administer the PTE election, which is binding until revoked under the Commission's procedures. For tax years beginning on or after January 1, 2019 and before January 1, 2020, the PTE election must be filed within 60 days of enactment, using the procedures prescribed by the Commission (which end date appears to be June 28, 2019). For tax years beginning on or after January 1, 2020, the election can be filed at any time during the preceding tax year, or two months and 15 days after the beginning of the tax year. If a PTE does not pay the tax when due, the Commission can revoke the PTE's election, effective for the first year in which the PTE entity-level tax is not paid. Additionally, a PTE election has priority over and revokes any election to file a composite Oklahoma partnership return or an S corporation's requirement to report and pay tax on behalf of the nonresident shareholder for the same year. Effective for tax years beginning on or after January 1, 2019, and after a PTE elects to pay the PTE tax, its members, in calculating Oklahoma taxable income or adjusted gross income, may subtract any item of gain or add any item of loss that, without the PTE election, would be allocated to the member or indirect member. For members or indirect members to be entitled to make these adjustments, the electing PTE must account for the item in computing its Oklahoma net entity income or loss,2 and the tax attributable to any resulting Oklahoma net entity income must be paid. The Commission will prescribe rules on reporting the exclusion to the electing PTE's direct and indirect members. Lastly, the adjusted tax basis of any ownership interest in a PTE equals the adjusted tax basis for federal income tax purposes. The Act's enactment of the PTE tax appears intended to provide a workaround to the federal $10,000 limit to the deduction for state and local tax paid (the SALT deduction cap), which was enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Oklahoma follows Connecticut and Wisconsin to become the third state to adopt a PTE workaround tax intended to avoid the limitation of the SALT deduction cap. As opposed to an income tax credit, the income exclusion may put the workaround in a better position to withstand federal challenge. Nonresident taxpayers should consider whether their home state will extend their "other state tax credit" to cover their share of any Oklahoma tax paid directly by the PTE under the election authorized by the Act, a concern equally at issue and not fully addressed by the laws of other states. PTE owners should examine this election and consider whether it makes sense to use it for not only Oklahoma state tax purposes but also federal and their own state of resident taxes. EY will continue to monitor this development and issue alerts as warranted.
1 A PTE is defined for purposes of the statute as "a general partnership, a limited partnership, a limited liability partnership, a limited liability limited partnership, a limited liability company, or a corporation, if any of the enumerated entity's items of income, gain, loss, and deduction, as applicable, are subject to being included on another person's return for federal income tax purposes under Subchapter K or Subchapter S of the Internal Revenue Code." Okla. Acts 2019, HB2665, §2 (to be codified at Okla. Stat. tit. 68, §2355.1P-2(6)). 2 "Oklahoma net entity income" or "Oklahoma net entity loss" is the positive or negative sum of an electing PTE's items of Oklahoma income, gain, loss, and deduction determined under Oklahoma's income tax laws, regardless of whether the items are required to be separately stated for federal income tax purposes. Okla. Acts 2019, HB2665, §2 (to be codified at Okla. Stat. tit. 68, §2355.1P-2(5)). 3 Okla. Stat. tit. 68, §§ 2385.29 (PTE definitions), .30 (Distributions by PTEs, withholding, and written statements of distributions made and amount withheld) and .31 (Amounts withheld by PTEs; fiduciary duty of state; failure to withhold, file return, pay required amounts, or furnish statement; liability for penalties and interest; fine). Document ID: 2019-0915 | |||||
