The Pass-Through Entity Tax Equity Act of 2019, HB 2665, signed by Oklahoma Governor Stitt on April 29, 2019, allows an electing pass-through entity (LLC, partnership or S-corporation) to pay the Oklahoma income tax at the entity level in exchange for providing the pass-through entity owners an offsetting deduction.
For income distributed to estates, trusts or individuals, electing entities are taxed at the highest marginal individual income tax rate. For income distributed to corporations, electing entities are taxed at the corporate income tax rate, which is currently 6%.
Prior to this legislation, each member, partner or S-corporation shareholder had to report their proportionate share of such entity income on their respective Oklahoma return and pay the applicable Oklahoma income tax. With this legislation, for tax years beginning on or after January 1, 2019, and prior to January 1, 2020, the election must be filed within 60 days of enactment, making the election for 2019 returns due no later than June 28, 2019.
For years beginning on or after January 1, 2020, the election must be filed within two months and 15 days after the start of the tax year or at any time in the preceding tax year. Likewise, a revocation of any election in effect may be filed within two months and 15 days after the start of the tax year. The Oklahoma Tax Commission is currently developing the required election and revocation forms and applicable administrative rules for further guidance.
This optional election may be advantageous for pass-through owners who are individual taxpayers that could be limited in the amount of state taxes they may deduct for federal purposes. However, this new legislation will not necessarily benefit all pass-through entities or its members, partners or shareholders.
Special considerations include the following:
- Nonresident members, partners or shareholders may not be able to credit the pass-through entity tax paid to Oklahoma in the calculation of their credit for taxes paid on their resident tax return because it is an entity-level tax. As such, this could result in the nonresident member, partner or shareholder to be taxed twice on the same income—in Oklahoma on their Oklahoma distributive share and in their resident state on the same Oklahoma distributive income without a corresponding credit.
- Partnerships that have special allocations to partners resulting in net losses may pay tax at the entity level if the overall partnership has net income.
Therefore, taxpayers should proceed with caution and discuss with their tax advisor the implications of making this potential election.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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