Oklahoma: New Pass-through Entity Tax Regime Enacted

Recently enacted legislation (House Bill 2665, signed April 29, 2019), the Pass-Through Entity Tax Equity Act of 2019, establishes a new elective tax imposed on pass-through entities for tax years beginning on or after January 1, 2019. The definition of a pass-through entity includes entities whose income is required to be reported on another person’s return under Subchapter K or Subchapter S of the Internal Revenue Code. The tax levied on each electing pass-through entity is calculated by multiplying the electing pass-through entity member’s Oklahoma distributive share income for the tax year by (1) the highest individual income tax rate if the member is an individual, trust or estate, or (2) six percent if the member is a corporation, a financial institution, or another pass-through entity.  The electing pass-through entity will then aggregate the amounts determined with respect to all members to arrive at the pass-through entity tax for the applicable tax year for which the election has been made. Oklahoma’s pass-through entity withholding provisions will not apply to electing pass-through entities.  The pass-through entity tax is due and payable on the same date as provided for the filing of the electing pass-through entity's Oklahoma income tax return, and for tax years beginning on or after January 1, 2020, estimated tax payments will be required.

If the election is made, a nonresident individual who is a member of an electing entity is not required to file an Oklahoma income tax return if, for the taxable year, the only Oklahoma source income is from the electing pass-through entity and the electing pass-through entity files and pays the taxes due. The Tax Commission will adopt procedures outlining how the election shall be made. Since the bill is retroactive, for the 2019 tax year, the election must be made within 60 days of House Bill 2665’s enactment. In future years, the election must be made at any time within the preceding tax year or within two months and fifteen days after the beginning of the tax year. Once the election is made, it is binding until revoked under procedures to be established by the Tax Commission.

To avoid double taxation, a modification will be made to Oklahoma taxable income (for corporations) and Oklahoma adjusted gross income (for individuals), to account for any amount of income or loss that (in the absence of an election) would be allocated to a member or indirect member of an electing pass-through entity.  An “indirect member” with respect to any particular electing pass-through entity is defined as an individual, fiduciary, or entity that (i) owns an interest in a pass-through entity other than the electing pass-through entity and (ii) has been allocated items of Oklahoma income, gain, loss or deduction that the electing pass-through entity included in computing its tax pursuant to the provisions of the Pass-Through Entity Tax Equity Act of 2019.  Please contact Amanda Kennedy at (405) 552-3859 or Lori Wiseman at (214) 840-6041 with questions on the new pass-through entity tax.