2019 -- H 5576

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LC001711

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2019

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A N   A C T

RELATING TO TAXATION -- BUSINESS CORPORATION TAX

     

     Introduced By: Representatives Shekarchi, Ackerman, Lima, Kazarian, and Noret

     Date Introduced: February 27, 2019

     Referred To: House Finance

     It is enacted by the General Assembly as follows:

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     SECTION 1. Chapter 44-11 of the General Laws entitled "Business Corporation Tax" is

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hereby amended by adding thereto the following section:

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     44-11-2.3. Pass-through entities -- Election to pay state income tax at the entity level.

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     (a) Definitions. As used in this section:

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     (1) "Election" means the annual election to be made by the pass-through entity by filing

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the prescribed tax form and remitting the appropriate tax.

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     (2) "Net income" means the net ordinary income, net rental real estate income, other net

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rental income, guaranteed payments, and other business income less specially allocated

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depreciation and deductions allowed pursuant to § 179 of the United States Revenue Code (26

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U.S.C. § 179), all of which would be reported on federal tax form schedules C and E. Net income

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for purposes of this section does not include specially allocated investment income or any other

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types of deductions.

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     (3) "Owner" means an individual who is a shareholder of an S Corporation; a partner in a

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general partnership, a limited partnership, or a limited liability partnership; a member of a limited

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liability company, a beneficiary of a trust; or a sole proprietor.

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     (4) "Pass-through entity" means a corporation that for the applicable tax year is treated as

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an S Corporation under I.R.C. 1362(a) (26 U.S.C. § 1362(a)), or a general partnership, limited

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partnership, limited liability partnership, trust, limited liability company or unincorporated sole

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proprietorship that for the applicable tax year is not taxed as a corporation for federal tax

 

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purposes under the state’s regulations.

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     (5) "State tax credit" means the amount of tax paid by the pass-through entity at the entity

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level which is passed through to an owner on a pro rata basis.

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     (b) Elections.

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     (1) For tax years beginning on or after January 1, 2019, a pass-through entity may elect to

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pay the state tax at the entity level at the rate of five and ninety-nine hundredths percent (5.99%).

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     (2) If a pass-through entity elects to pay an entity tax under this subsection, the entity

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shall not have to comply with the provisions of § 44-11-2.2 regarding withholding on non-

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resident owners. In that instance, the entity shall not have to comply with the provisions of § 44-

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11-2.2 regarding withholding on non-resident owners.

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     (c) Reporting.

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     (1) The pass-through entity shall report the pro rata share of the state income taxes paid

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by the entity which sums will be allowed as a state tax credit for an owner on his or her personal

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income tax return.

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     (2) The pass-through entity shall also report the pro rata share of the state income taxes

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paid by the entity as an income (addition) modification to be reported by an owner on his or her

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personal income tax returns.

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     (d) Net taxable income for purposes of this subsection shall be calculated in accordance

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with § 44-11-2.4(a)(3), subject to applicable apportionment rules for businesses operating in

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multiple states.

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     (e) State tax credit shall be the amount of tax paid by the pass-through entity, at the entity

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level, which is passed through to the owners, on a pro rata basis.

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     (f) A similar type of tax imposed by another state on the owners' income paid at the state

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entity level shall be deemed to be allowed as a credit for taxes paid to another jurisdiction in

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accordance with the provisions of § 44-30-18.

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     (g) "Combined reporting" as set forth in § 44-11-4.1 shall not apply to reporting under

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this section.

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     SECTION 2. This act shall take effect upon passage.

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO TAXATION -- BUSINESS CORPORATION TAX

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     This act would provide for a pass-through entity tax to shift the income tax liability from

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an entity's owner to the entity itself. The tax would be deductible by the entity thereby helping to

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offset the effect of the ten thousand dollar ($10,000) limit on an individual's state and local tax

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(SALT) deductions by reducing their share of overall allocable income.

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     To ensure against double taxation, the act would provide owners with a tax credit to

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offset the tax on their share of the entity's after pass-through entity tax income.

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     This act would take effect upon passage.

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