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On May 19, 2023, Montana Governor Greg Gianforte signed Senate Bill 554 (SB 554), making Montana the latest state to adopt an elective pass-through entity (PTE) tax intended to comply with IRS Notice 2020-75.¹ The law is effective for tax years beginning after December 31, 2022.

Montana law requires a PTE to file an informational return and withhold on a nonresident owner's distributive shares of Montana-sourced income. Nonresident owners then receive a refundable credit on the individual income tax return. A PTE also may pay a composite tax, which relieves nonresident owners from filing an individual income tax return, provided the PTE income is the nonresident owner's sole source of Montana income.

SB 554 allows a PTE to make an annual election to pay tax at the entity level at the highest marginal rate applicable to the tax year (6.75% for tax year 2023, reduced to 5.9% in 2024). The PTE must make the election by the due date of its return on a form to be prescribed by the Montana Department of Revenue (Department). The PTE also must designate a representative who is authorized to make the election; the actions of this representative are binding on all PTE owners.

The tax base is the distributive share of all owners' income allocated or apportioned to Montana under MCA 13-30-3302, as if the PTE were a C corporation. The PTE, however, may substitute the income allocated or apportioned under MCA 13-30-3302 with the resident owners' entire distributive share of income computed under MCA 15-30-2101. The electing PTE must make quarterly estimated payments and is subject to underpayment interest and penalties.

The PTE tax is added back into federal adjusted gross income on the owners' individual income tax returns. The electing PTE owners will then receive a refundable credit for the tax paid by the electing PTE. An owner that is also an electing PTE will claim its distributive share of entity tax paid by another PTE as a refundable credit against its Montana tax liability. An owner that is not an electing PTE must allocate its distributive share of entity tax paid by another electing PTE and any estimated tax paid to owners liable for the tax under Montana law. An owner that is not an electing PTE may claim the remainder of the PTE tax as an overpayment or refund. SB 554 does not prevent a resident owner from claiming a credit for taxes paid to other states as provided in MCA 15-30-2302.

Implications

SB 554 authorizes the Department to adopt rules and prescribe forms necessary to administer this new tax. For example, the Department may need to issue guidance on the requirement to make estimated payments, such as allowing an electing PTE to offset its tax liability with the withholding or composite tax estimates. Many states that have adopted these taxes waive the requirement to make estimated payments at least in the year when the election is first available. EY will continue to monitor developments in this area.

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor

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ENDNOTE

¹Jurisdictions that have enacted a PTE tax as a workaround to the federal limitation on the state and local tax deduction are Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New Mexico, New York, New York City, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin.