Louisiana Acts on Pass-Through Entity Tax Legislation

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Louisiana Senate Bill 223 was signed by the governor and became effective on June 22, 2019. The bill allows S corporations or any other entities taxed as partnerships for federal income tax purposes to elect to be taxed as if the entity were a C corporation for Louisiana income tax purposes. The election is due by the 15th day of the fourth month after the close of the taxable year but may be made at any time prior to the deadline. Late elections may be allowed by the state at its discretion.

Once elected, the business is bound to be taxed as a C corp for all subsequent tax years. This will continue until the election is terminated by the secretary of revenue. Taxpayers may apply for termination of the election if more than half of the owners consent to the termination. The secretary may terminate an entity’s election depending on material changes in circumstances. Terminations of the election are not automatically granted.

Tax will be calculated by the elected pass-through entity as a whole (rather than on each member or partner’s share) using the following schedule of rates:

  • Two percent of the initial $25,000 of Louisiana taxable income
  • Four percent of Louisiana taxable income between $25,001 and $100,000
  • Six percent of Louisiana taxable income in excess of $100,000

Louisiana law currently requires S corps to pay income tax at the corporate rates of 4, 5, 6, 7 and 8 percent on all taxable income in excess of $200,000 (if not making a special election available to S corps that allows income and losses passed on to shareholders to be excluded).

In the calculation of Louisiana taxable income, a pass-through entity is allowed a deduction for the amount of federal income tax it would have paid on its net income if the entity were taxed as a C corp for federal income tax purposes. Individual shareholders, partners or members should exclude from Louisiana taxable income their share of income or loss received from the pass-through entity.

This provision appears to attempt to lessen the effect of the federal limitation of deduction for state and local taxes for the owners of the pass-through entity. Pass-through entities should analyze how these changes in both Louisiana corporate and individual income tax provisions will ultimately affect their business and members. 

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