March 8, 2023 Montana expected to adopt single sales factor apportionment, reduce top individual tax rate and net-long term capital gains deduction, increase business property tax exemption The Montana legislature approved multiple pieces of legislation that were part of Governor Greg Gianforte's budget proposal. Once enacted, the legislation will adopt a single sales factor apportionment formula, reduce Montana's top individual income tax rate, replace the net-long term capital gain deduction with a tiered-rate system and increase the business equipment property tax exemption. The governor is expected to sign these bills in the coming days. Single-factor apportionment Under current law, Montana income is apportioned using a double-weighted sales factor, which was implemented for tax years beginning after June 30, 2021. See Tax Alert 2021-0859. Before the 2021 change, Montana used an evenly weighted three-factor apportionment formula. SB 124 would move Montana to a single sales factor apportionment formula for tax years beginning after December 31, 2024. The legislature had considered immediate adoption of the single sales factor but decided to delay implementation of this change. Individual income tax rate In 2021, the legislature enacted SB 399, which reduced the number of income tax brackets to two starting in 2024. Under SB 399, a 4.7% tax rate applies to $20,500 or less of taxable income for single filers ($41,000 for married couples filing jointly), while a 6.5% tax rate applies to taxable income above $20,500 for single filers ($41,000 for married couples filing jointly). SB 121, however, would reduce the rate on the top bracket from 6.5% to 5.9% starting in 2024. SB 121 also would increase Montana's Earned Income Tax Credit from 3% of the federal credit to 10%. This change would become effective in 2024. Long-term capital gains HB 221 would replace the state's 30% net long-term capital gains deduction, set to take effect in 2024, with a two-tier tax rate system. Rates of 3.0% and 4.1% would apply to net-long term capital gains as follows:
The 3.0% and 4.1% rates, however, would be 3.5% and 4.5%, respectively, if any of the following five bills are not enacted: HB 192, HB 212, HB 222, HB 251 and HB 267. Each of these bills has been approved by the legislature and will be sent to the governor for his expected signature. Business property tax exemption HB 212 would increase the business equipment property tax exemption from $300,000 to $1 million. Effective for tax years beginning after December 31, 2022, the first $1 million of market value of class eight property of a person or business entity would be exempt from taxation. The exemption, however, would only increase to $500,000 if any of the following five bills are not enacted: HB 192, HB 221, HB 222, HB 251 and HB 267. Each of these bills has been approved by the legislature and will be sent to the governor for his expected signature. Implications Montana would join the majority of states that have implemented a single sales factor, although with a delayed implementation. Taxpayers should consider these changes. EY will continue to monitor developments in this area. ———————————————
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor | |||||||||||||||||||||||
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