July 31, 2019The Journal Record |
OKLAHOMA CITY – A new state law signed by Gov. Kevin Stitt applies to pass-through corporations and will allow some business owners and others in the state to save money on federal taxes.
In years past, the federal government allowed business owners and partners who earn income distributed by “pass-through” corporations to write state and local taxes off on federal income tax returns. That changed with passage of the federal Tax Cuts and Jobs Act in 2017, when a $10,000 limit was placed on the so-called SALT deduction. Since then, a number of states have tried in different ways to restore the income lost by their corporate citizens. According to Mike Jackson, executive vice president of the State Chamber of Oklahoma, the chamber supported House Bill 2665, which a signing celebration was held for on Tuesday at the Capitol. He said the “SALT Parity Fix” may apply to nearly 135,000 businesses.
“Restoring the SALT deduction allows Oklahoma businesses to compete more effectively, at no cost to our state,” a chamber news release said.
The new law gives pass-through businesses, including limited liability corporations, partnerships and S corporations, the option of paying their taxes at the “entity level.” It shifts state taxes from individuals to pass-through entities, or PTEs, allowing owners to claim a credit on their state tax return for the owner’s distributive share of taxes paid by the PTE.
“It allows them to pay through the pass-through and realize within the entity the deduction currently given to C corporations,” Jackson said.
According to the State Chamber, in 2017, before passage of the federal Tax Cuts and Jobs Act, income amounting to $1 million that might have flowed through a pass-through corporation to an owner would have been subject to a $50,000 state tax bill, which would then have been trimmed from the owner’s federal tax bill, leaving him or her to pay a federal bill of $351,500. After the new federal law limited the SALT deduction to $10,000, the individual in 2018 would still have had to pay $50,000 in state taxes but would have been held to paying a $366,300 federal tax bill.
The new Oklahoma law will restore the owner’s loss by allowing the pass-through corporation to pay his or her $50,000 state tax bill. As a consequence, the owner’s income for federal income tax purposes would be reduced to $950,000. That would then reduce the individual’s federal income tax bill back to $351,500.
According to the Tax Policy Center of the Urban Institute and Brookings Institution, most U.S. businesses are not subject to the corporate income tax. Rather, profits flow through to owners and are taxed under the individual income tax. Pass-through businesses include sole proprietorships, partnerships, and S corporations. The share of business activity represented by pass-through entities has been rising in recent decades.
Connecticut and Wisconsin were the first states to enact the PTE level tax as way to reverse business owner losses resulting from the federal tax act. Jackson said Oklahoma was the third state to do so. Other states, like California and New Jersey, have attempted fixes in different ways but have encountered setbacks in rulings by the Internal Revenue Service. So far, the IRS hasn’t issued any guidance on the use of PTEs to circumvent the SALT cap.