By RICH WAIGAND
In August of 2022, Missouri joined 29 other states in passing a law that helps businesses and their owners pay less in combined income taxes. The new law known as the “Missouri SALT Parity Act,” is effective beginning with tax years ending on or after December 31, 2022. It allows S corporations or partnerships (pass-through entities) to annually elect to become an affected business entity required to pay the pass-through entity tax. Qualifying owners of an electing pass-through entity are eligible for a credit equal to the member’s pro rata share of the pass-through entity tax paid.
Why Was This Law Passed?
In 2018, the Tax Cuts and Job Act significantly increased the standard deduction for all individual taxpayers and at the same time capped the amount of state and local tax (SALT) taxpayers can deduct on their individual tax return at $10,000. Prior to the passage of the SALT Parity Act, Missouri law provided that in lieu of a corporate income tax, shareholders and partners of pass-through entities pay income tax on their pro rata share of the entity’s income attributable to Missouri.
As a result, many owners of passthrough entities were no longer able to deduct the full amount of state and local taxes paid on their federal tax return. For example, a shareholder of an S corporation that has $1,000,000 of flow-through income from their business would typically pay approximately $45,000 in Missouri income tax. Assuming the shareholder already had real and personal property taxes of close to $10,000, most – if not all – of the state income taxes paid were not deductible on the owner’s personal tax return. At a 37 percent federal tax rate, this would cost the business owner approximately $17,000 in additional federal income tax. By having the entity make the election to pay the MO-PTE, the owners can once again receive a federal tax benefit on state income taxes paid. Since many S corporations and partnerships qualify for another TCJA tax deduction known as the Qualified Business Income deduction of up to 20 percent of their pass-through income, these taxpayers will see an incremental federal tax savings of approximately $13,000 per $1 million of flow-through income.
Entity-Level Tax Election
Entities may make the election to pay the pass-through entity tax on form MO-PTE. They must make a separate election each tax year. The election must be signed by each member of the entity or by any officer, manager, or member of the entity who is authorized to make the election and who attests to having authorization under penalty of perjury.
Note: An electing entity must designate a representative for the tax year who will act on behalf of the entity on certain matters.
Tax is equal to the sum of each member’s income and loss items, reported on schedule K of form 1120-S or 1065 as described in federal law (not including guaranteed payments), reduced by the deduction allowed for qualified business income, as described in federal law, multiplied by the highest rate of tax in effect for the state personal income tax, which is 5.3 percent for tax year 2022.
As noted above, qualifying owners of an electing pass-through entity are eligible for a credit equal to a taxpayer’s pro rata share of the Missouri tax paid by the electing entity. The credit is nonrefundable and may be carried forward to subsequent tax years.
In some instances, a resident or part-year resident individual taxpayer may be entitled to a credit for the taxpayer’s pro rata share of a similar tax paid by an electing entity to another state. This credit is nonrefundable and may not be carried forward to subsequent tax years.
Nonresident Owners of the Entity
A nonresident individual owner of an electing entity does not have to file a Missouri income tax return for a tax year if, for the tax year:
the individual’s only income derived from Missouri sources is from one or more electing entities; and
the electing entities file and pay the tax due
What if My Company Does Business in Multiple States?
Missouri has created Form MO-MS PTE, which is the Pass-Through Entity Allocation and Apportionment of Income Schedule, which will be used by your company’s tax preparer to allocate the income and tax appropriately to each state in which you do business.
How Do I Record the PTE Payment on My Company’s Books?
There has been a lot of debate in the accounting profession about how companies should record PTE payments on their books. The two most widely discussed accounting treatments for these payments are:
report the payment as a distribution (equity transaction) or
report the payment as income tax expense (on the income statement)
While there is no specific guidance published by the accounting standards board addressing these new state level tax elections, it will likely come down to a state-by-state level determined by who is legally responsible to pay the tax (the company or the owner).
Rich Waigand, CPA, is a partner at SFW Partners, LLC, CPAs and Management Consultants. He specializes in helping construction companies get better and more timely information from their accounting systems and provide guidance on proper financial reporting that is relevant to management, lenders and bonding companies. Waigand can be reached at email@example.com or (314) 569-3333.