Missouri legislators override veto of major tax cut package
TAX ALERT |
On May 6, 2014, Missouri lawmakers successfully voted to pass Senate Bill 509, overriding Governor Nixon’s May 1 veto. Pursuant to this measure, starting January 1, 2017, Missouri will phase in a 0.5 percent reduction in Missouri’s personal income tax rate, annually re-index the personal income tax brackets based on inflation, and allow a phased-in 25 percent personal income tax deduction for business income included in personal income. Although not without controversy, the bill stands to be the most significant statewide personal income tax cut in nearly a century.
Personal income tax rate reduction
Under current law, Missouri personal income is subject to personal income tax at a graduated rate starting at 1.5 percent of Missouri income not over $1,000. The top personal income tax rate for a Missouri resident is 6 percent on taxable income greater than $9,000, and the next highest rate is 5.5percent on taxable income greater than $8,000 and not over $9,000. One of the tax reduction measures in Senate Bill 509 is to ultimately eliminate the top rate by gradually merging it into the next highest rate.
To accomplish this goal, starting in calendar year 2017 and after net general revenue metrics are achieved, the 6 percent rate will be reduced by 1/10 of a percent (0.10 percent) to 5.9 percent. For each year thereafter that net general revenue metrics are achieved, the top rate will be reduced by an additional 0.10 percent until the top rate reaches 5.5 percent (currently the level of the next highest rate).1
The rate of the phase-in will be determined by annual growth in net general revenue. Each year that net general revenue collected in the previous fiscal year exceeds the highest amount of net general revenue collected in any of the three immediately preceding fiscal years by at least $150 million, a rate reduction will occur. If the required net general revenue increase is not met in any particular year, no rate reduction will occur for that year, and the opportunity for a rate reduction will be pushed to the next year.2 Accordingly, the earliest year that the 6 percent rate could be fully phased out is 2021, but it could take a longer period of time.
Personal income tax bracket annual increase
Under current law, Missouri’s personal income tax brackets are fixed, with the bottom bracket starting at $0 and increasing every $1,000 until the top rate is applied to income above $9,000. Pursuant to Senate Bill 509, starting with the 2017 calendar year, the state’s personal income tax brackets will be subject to an annual increase based upon the annual Consumer Price Index (CPI) increase, if any, as reported by the U.S. Bureau of Labor Statistics.3
Personal income tax deduction for business income
In addition to the rate reduction and bracket changes, Senate Bill 509 will phase in a personal income tax deduction for business income included in an individual’s personal income on his or her personal income tax return, providing a potentially substantial benefit for sole proprietors and owners of pass-through entities. Starting in calendar year 2017 and after net general revenue metrics are achieved, individuals may deduct from personal income 5 percent of Missouri-source net profits determined by adding together (1) schedule C total combined profit, and (2) total partnership and S corporation income/ loss reported on IRS Schedule E, Part II. For an individual’s pass-through entity income, the deduction is “apportioned in proportion to their share of ownership of the business as reported on the taxpayer’s schedule K-1.”4 For each year after 2017 that net general revenue metrics are achieved, the deduction will increase by 5 percent until the deduction equals 25 percent.5 The net general revenue requirements for the phase-in of this deduction are the same as those applicable to the phase-out of the 6 percent top tax rate.
Although it is uncertain how quickly the top personal income tax rate will phase out and the maximum business income deduction will phase in, the benefits of these measures may prove to be substantial to individuals subject to Missouri personal income tax, particularly for individuals who derive significant business income from sole proprietorships and pass-through entities. In light of these benefits, individuals forming new businesses should reconsider the tax implications of their choice of entity, and owners of closely held C corporations should consider whether a change in form or an S election would be appropriate.
1 RSMo 143.011 (lines 26-33 and 41-45)
2 RSMo 143.011 (lines 34-38)
3 RSMo 143.011 (lines 46-62)
4 RSMo 143.022 (lines 1-23)
5 RSMo 143.022 (lines 26-46)
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