Oklahoma Governor Kevin Stitt signed legislation providing for an election that pass-through entities can use to be taxed at the entity level. Enacted April 29, 2019, Oklahoma House Bill No. 2665 allows partnerships and S corporations to elect to pay income tax at the entity level. Making the election could simplify the tax compliance responsibilities of a pass-through entity’s members.
An electing entity calculates the tax on each member’s distributive share of the entity’s income. The entity’s distributive share of federal taxable income for each member must first be adjusted to arrive at each member’s respective share of Oklahoma taxable income for corporations or adjusted gross income for individuals. Tax is applied at the highest marginal tax rate applicable to that member. The total of the tax amounts calculated at the member level is then aggregated and reported as the entity level pass-through entity tax. Losses are calculated at the entity level and may be carried back and carried forward by the electing entity.
The election is applicable to all members and must be made by two months and 15 days after the beginning of the tax year. An election must be filed within 60 days of the bill’s enactment to be applicable for years beginning on or after January 1, 2019, and prior to January 1, 2020. The election is binding for future years and revokes and overrides any election to file a composite return made for the same tax year. Revocations made within two months and 15 days after the start of the tax year will be effective as of the first day of the tax year. Any revocations made after that date will be effective the first day of the following tax year.
The due date for the pass-through entity tax is the same as the electing entity’s standard income tax return due date, with estimate payments required for tax years beginning on or after January 1, 2020. Nonresident individuals will not be required to file an Oklahoma income tax return provided their only Oklahoma source income is reported by electing pass-through entities.
While the stated purpose of the new law is “to achieve a more fair and simplified taxation of pass-through entities and their members,” it also provides some relief for federal deductions otherwise lost due to the state and local tax deduction limitation enacted as part of the Tax Cuts and Jobs Act. As noted in a previous BKD Thoughtware® article, the IRS could still take issue with workarounds to this limitation and enact hurdles to frustrate states’ efforts.
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