Mississippi will allow PTEs to elect to pay tax at the entity level

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This year, a number of state legislatures considered and passed legislation that creates a flow-through entity tax (FTT) as a workaround to the $10,000 cap on the itemized deduction of state and local taxes ( SALT). Nearly 30 states have adopted a PTE tax. Mississippi is one of the newest states to join the ranks.

Beginning this tax year, Mississippi will allow PTEs to elect to pay tax at the entity level rather than at the individual partner/member level. (See previous coverage here.) This election, passed in the 2022 legislative session, is designed to mitigate the impact of the federal limitation on itemized deductions for SALT. The Department of Revenue (DOR) recently published Notice 08-22-001 to clarify several important election and compliance issues, but some uncertainty remains as to exactly how the election will take place.

PTEs contemplating election should begin this process now in order to take appropriate internal action within the election timeframe and resolve any compliance issues or issues not addressed by the original bill or recent notice of the GOLDEN.

When and how to make an election

The election must be made no later than the 15th day of the third month following the close of the taxation year for which the entity elects to be taxed as an electing PTE. This means that most qualifying entities will have until March 15, 2023 to make the election in respect of the 2022 tax year. No election was available for the 2021 tax year because the law was not passed until after the election deadline for that year.

The DOR will provide a new flow-through entity election form, Form 84-381, which must be submitted within the applicable time frame, but this form does not appear to be available on the DOR’s website at this time. Once made, the election is binding for the tax year and all subsequent tax years, unless the election is revoked by the electing PTE through the same process and voting threshold used for to make a choice.

What vote is required for approval?

To make or revoke an election, there must be “a vote or the written consent of the members of the governing body of the entity as good as a vote by or written consent of owners, members, partners or shareholders holding more than fifty percent (50%) voting control of the entity, within the time period prescribed in this paragraph” (emphasis added). Thus, approval must be made at two levels: although management decisions may be centralized in a board or other governing body, the latter vote must pass through a specified threshold and both votes must occur within a specified time frame. .

It is important to note that this legal election requirement overrides and may be inconsistent with voting rights and thresholds provided in an entity’s governance documents. For example, it is common that certain important elections are approved by more than 50% of the votes of the members, or that different members may have different voting or consent rights on these types of matters. Additionally, a strict reading of the law may also raise questions about whether a simple manager governance structure constitutes a centralized board or an “other governing body”. It is also unclear how this electoral provision will work in a multi-tiered structure containing multiple PTEs, particularly if the owner-level exemption is contingent on a tax payment being made by that immediate PTE as opposed to a higher in the chain.

Unfortunately, Advisory 08-22-001 does not address or resolve these issues. Any entity whose governance structure may be inconsistent with these requirements should contact the DOR now, well before the election deadline, to discuss what internal votes and approvals will be acceptable.

What returns will be filed?

Electing Entities will file the Conveying Entity Income Tax Return, Form 84-105, but check the “Elect Conveying Entity” box in order to be taxed at the entity level. The updated return form does not appear to be available on the DOR website at this time. A copy of the flow-through entity election form, Form 84-381, must also be attached to the return. Mississippi Schedule K-1, Form 84-132, for each owner, member, partner, or shareholder of the electing entity must also be attached to the return. K-1s must have the “Passing Entity Election” box checked with the amount of tax paid by the electing entity for each partner provided on the K-1s.

Bill the choice in estimated tax payments of individuals and entities

Members of any elective PTE should adjust their estimated tax payments to reflect that such taxes will be paid at the entity level rather than at the individual level. The entity will now be required to make estimated payments if it has annual tax payable in excess of $200.

Estimates are due no later than the 15th day of the fourth, sixth, ninth, and twelfth month of the income year and generally match federal deadlines. Payments must be submitted using the Pass-Through Entity Income Tax Voucher, Form 84-300. Estimated tax payments must not be less than 90% of annual income tax payable. Any taxpayer who fails to file a return and pay tax by the due date of the return or who underestimates the amount required could be subject to a penalty of 10% plus interest of 0.5% per months on the underpayment of tax from the payment due date. until paid or until the next payment due date, whichever comes first.

Notice 08-22-001 acknowledges that there may be complications with some of the estimated advance payments. Any Election Entity that receives a penalty notice for understating its 2022 first and second quarter estimated payments should contact the DOR to request a reduction of any proposed penalty.

Does the election have an impact on composite returns?

If an entity chooses to pay tax at the entity level, it will no longer need to file a composite return. One entity cannot file at a time. Per Notice 08-22-001, compound returns may only be filed on behalf of nonresident partners with no other business in Mississippi other than that of the PTE. Once an entity begins filing a composite return, it must continue to file in this manner unless the DOR has granted permission to amend or an election to file as an elective entity has been made. do.

Mechanics of the tax credit paid at the entity level

Each member of an elective PTE will receive and be able to claim a prorated credit for any income tax paid at the entity level. This credit will be reported on the member’s Mississippi K-1, which must be attached to the member’s return similar to that required for traditional claims for credits for taxes paid to other states. Mississippi will allow members to claim similar entity-level taxes paid to other states as long as proper support is included with the return. Failure to attach these forms has historically resulted in delays in processing returns, temporary denials of refunds, and in some cases issuance of assessment notices due to the denial of claimed but unsubstantiated credits.

Notice 08-22-001 provides that “partnerships, S corporations or similar flow-through entities that are owners, members, partners or shareholders of an elective PTE may also benefit from a tax credit for taxes paid on elective PTE return on their separate Mississippi. Transferring Entity Tax Returns, Form 84-105. Noticeably absent from the guidelines is any reference to whether or how a business owner can claim this credit. Thus, it remains to be determined whether the income distributable by an elective PTE to an owner company will be exempt as well as that received by individuals. Otherwise, the election could result in double taxation of such income at the ETP and member firm level.

Other questions remain

In our original cover of the legislation, we have identified several important issues that were not addressed by the original bill, some of which are mentioned above. Unfortunately, Notice 08-22-001 leaves open the question of whether paying entity-level tax will sever the link for business owners whose only contact with the state is through this PTE. The impact of the election on the calculation of a member’s base is also not discussed. Basic rules contained in the legislation should help minimize federal/state differences in calculations of gain or loss when selling an interest, but this issue has not been formally addressed at this stage.

It is possible, perhaps likely, that the DOR will issue additional guidance on some of these issues and others before the election deadline passes in March.

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