The Louisiana and Oklahoma state legislatures have each approved a pass-through entity tax regime during their 2019 sessions. Oklahoma House Bill 2665 was signed by Governor Kevin Stitt (R) on April 29 and is effective beginning with tax year 2019. Louisiana Senate Bill 223 passed both the Louisiana Senate and House and was sent to Governor John Bel Edwards (D) for consideration on June 7.
The bills are intended to mitigate the impact on individual taxpayers of the federal $10,000 itemized cap on state and local taxes. In addition, the bills follow in the same vein as recently enacted legislation in Connecticut and Wisconsin along with various other state proposals. See our previous insight discussing certain of these proposals.
The provisions of both bills are elective. Under the Oklahoma legislation, elections for the 2019 tax year are due June 28, 2019.
Despite the distinct approaches described above, each state’s pass-through entity tax regime would allow electing PTEs to lessen the impact of the federal limitation on the itemized deduction on state and local taxes. Modeling will be required by potentially impacted PTEs to calculate any obtainable benefit available as the result of an election in either state. Overarching the entire decision-making process for PTEs with non-resident partners is an understanding that the benefit of the election will be highly dependent on the residency of their partners. For a partner in low- or no-tax jurisdictions (e.g., Texas or Florida), the election may be more beneficial, whereas for partners in certain high-tax jurisdictions the loss of the credit for taxes paid to other states at the individual level (tax burden shifted from individual to entity level) could result in a net increase in taxes to these partners, despite the federal benefit of the tax deduction.
Note: It remains to be seen how, or if, the US Treasury and the IRS will respond to the recent PTE tax proposals. Of additional consideration for electing PTEs will be the ASC 740 Accounting for Income Taxes impact of any elections.