Oklahoma enacted legislation that will allow pass-through entities to elect to pay Oklahoma income tax on the entity level in exchange for providing the pass-through entity owners an offsetting deduction equal to the allocation of state income, gain, loss or deductions. HB 2665 allows partnerships and S corporations to elect for entity-level taxation for tax years beginning in 2019. For the 2019 tax year only, the election must be filed within 60 days of the HB 2665’s enactment (April 29, 2019). The Oklahoma Tax Commission’s guidance on the manner in which to make the election is forthcoming.
For income distributed to estates, trusts or individuals, electing entities are taxed at the highest marginal individual income tax rate, while income distributed to corporations is taxed at the corporate income tax rate, currently 6 percent.
One member noted there may be a negative tax consequence to an out-of-state owner of a pass-through entity making this election, stating, “For example, Colorado individuals are taxed on their worldwide income. If the entity making the election has Colorado owners, it appears the Colorado owners will not get a tax credit for taxes paid to another state, i.e., Oklahoma, because the taxes are paid by the entity and not the owner. Therefore, the Colorado owner would be taxed twice: once in Oklahoma on the Oklahoma sourced income and then again in Colorado on the Oklahoma sourced income (net of the taxes the entity paid in Oklahoma) with no offsetting Colorado tax credit.”
In addition, the member noted “Another possible negative consequence may occur with partners who have special allocations. For example, a partnership has special allocations in which one or more partners, through special allocations, have a net loss, but the overall partnership has net income.”