United States

Rhode Island enacts pass-through entity level tax

TAX ALERT  | 

On July 5, 2019, Rhode Island Governor Gina Raimondo signed the fiscal year 2020 state budget, House Bill 5151. Among other changes, the legislation amends the state’s Business Corporation Tax by adding an elective pass-through entity-level tax effective for tax years beginning on or after Jan. 1, 2019.

The Rhode Island Tax

Effective for tax years beginning on or after Jan. 1, 2019, pass-through entities may elect to be taxed at the entity level. A qualifying pass-through entity includes a corporation, that for the applicable tax year, is treated as an S corporation under section 1362(a), or a general partnership, limited partnership, limited liability partnership, trust, limited liability company or certain unincorporated sole proprietorships.

The new tax is imposed at a rate of 5.99% of the pass-through entity’s net ordinary income less depreciation deductions allowed under section 179 and less various other deductions. After making the election, the pass-through entity no longer needs to comply with provisions regarding the state tax withholding of non-resident owners.

Under the election, the pass-through entity has two main owner reporting requirements: 1) the pro rata share of the state income taxes paid by the entity which sums will be allowed as a state tax credit for an owner on his or her personal income tax return and 2) the pro rata share of the state income taxes paid by the entity as an income (addition) modification to be reported by an owner on his or her personal income tax returns.

The owner, partner or member of the electing pass-through entity may take a state tax credit on their personal Rhode Island income tax return, and may also take a credit for similar entity taxes imposed by other states on the owners’ income paid at the state entity level.

Takeaways

In 2018, Connecticut and Wisconsin both adopted a pass-through entity-level tax. As of the date of this alert, Louisiana, Oklahoma and now Rhode Island have adopted similar provisions for the 2019 tax year, primarily in response to tax reform and the $10,000 state and local tax deduction limitation.

The new pass-through entity tax is elective. The election is made by the pass-through entity each tax year, and while other types of entities may benefit by converting to a pass-through, not all eligible taxpayers may benefit from the election. Taxpayers with questions about whether and how the election may benefit their state and federal tax footprint should contact their state tax advisers with questions.

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