Attention Rhode Islanders…Governor Gina Raimondo recently signed the fiscal year 2020 state budget, which includes several changes, most notably an elective pass-through entity level tax effective for tax years beginning on or after January 1, 2019.

What is a pass through entity level tax?

An entity-level tax assesses a liability directly on the firm before the income passes to the owners, similar to the corporate income tax. The owner 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 level.

Qualifying pass through entities include…

• Corporations (treated as an S corporation under section 1362(a) for the applicable tax year)
• General partnerships
• Limited partnerships
• Limited liability partnerships
• Trusts
• Limited liability companies
• Certain unincorporated sole proprietorships

What is the rate of the new tax?

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

What are the reporting requirements?

The pass-through entity has two main owner reporting requirements after making the election:

1. The pro rata (proportional) share of the state income taxes paid by the entity—as noted earlier, the sum will be allowed as a state tax credit for the owner’s (pass-through entity’s member, partner, shareholder or principal) on his/her resident state income tax return;
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/her personal income tax returns

Do other states have this election in place?

Along with Rhode Island, Louisiana and Oklahoma have adopted similar provisions for the 2019 tax year, and in 2018 Connecticut and Wisconsin adopted the tax as well.

Election is voluntary?

Yes, the new pass-through entity tax is elective, meaning eligible taxpayers can decide whether or not the election will benefit them.

Wondering if the election will benefit your entity? Contact us.