Presentation for the Central Oklahoma Society of Oklahoma Pass‐Through Entity Tax Equity Act of 2019 Enrolled Agents, September 11, 2019 Mark Neumeister is Director of Tax Services Mark O. Neumeister at D. R. Payne & Associates, where he is responsible for all aspects of the Firm’s tax services. Mark is a certified public & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . accountant and serves several professional O k l a h o m a P a s s ‐ accounting organizations including the Oklahoma Society of CPAs, where he serves on the small firms practice committee and tax committee. Mark provides a variety of tax services to his clients including tax T h r o u g h E n t i t y T a x preparation, planning, tax controversies, and criminal tax defense. Mark also serves as an expert witness for tax and accounting D . R . P a y n e D . R . P a y n e matters. Mark has volunteered his time on numerous civic and charitable activities over E q u i t y A c t o f 2 0 1 9 the years, and is currently active with such organizations as the Oklahoma Business Ethics Consortium and the Rotary Club of Oklahoma City. Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 1 2 Objectives • This presentation is provided solely for the & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances. Explore Examples Consider Disclaimer • These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting or tax advice. D . R . P a y n e D . R . P a y n e Explore new Work through Consider which • Views expressed in this presentation are not provisions of the example taxpayers may or necessarily those of D. R. Payne & Associates, Act. calculations. may not benefit. Inc. Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 3 4 Mark O. Neumeister D. R. Payne & Associates, Inc.
Presentation for the Central Oklahoma Society of Oklahoma Pass‐Through Entity Tax Equity Act of 2019 Enrolled Agents, September 11, 2019 Table of Contents • Background • OTC FAQs 6 35 & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . • Oklahoma’s Pass‐Through • Additional Considerations 41 Entity Tax Equity Act of • Examples 62 2019 12 • Resource Table 65 Background • Election 14 • Presentations by Mark • Impact of Election on Entity 20 Neumeister 68 D . R . P a y n e D . R . P a y n e • Impact of Election on Owner 26 • Definitions 31 Mark O. Neumeister Last Updated 09/09/2019 Last Updated 09/09/2019 5 6 Tax Cuts and Jobs Act of 2017 States Workaround Solutions • 1. Charitable contributions & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . • Localities develop “charities” and taxpayers “donate” the amount of property tax otherwise owed to the “charities,” receiving a property tax credit for the donation. • Effectively, then, the workaround converts a property tax payment to a charitable contribution. • IRS Issues Notice 2018‐54 https://www.irs.gov/newsroom/irs‐issues‐ notice‐on‐state‐and‐local‐tax‐deductions Adobe Acrobat D . R . P a y n e D . R . P a y n e Document • Warns that “federal law controls the proper characterization of payments for federal income tax purposes.” • Substance over form warning. • IRS Issues Regulations 6/11/2019, TD 9864 effective August 12, 2019. Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 7 8 Mark O. Neumeister D. R. Payne & Associates, Inc.
Presentation for the Central Oklahoma Society of Oklahoma Pass‐Through Entity Tax Equity Act of 2019 Enrolled Agents, September 11, 2019 States Workaround Solutions States Workaround Solutions • 2. State Payroll Tax • 4. Entity Level Tax & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . • Replaces state personal income taxes with a payroll tax paid by employers. • Several states have enacted entity level taxes on pass‐through entities, with • New York enacted an optional payroll tax corresponding state tax credit to owners. • Connecticut in 2018 became the first state to enact a SALT deduction cap • 3. Trusts workaround involving an entity‐level tax on passthroughs and an offsetting • Use of non‐grantor trusts to skirt the $10,000 limitation. personal income tax credit for entity members. • Property transferred to LLC owned by multiple non‐grantor trusts. Idea is that each trust has its own $10,000 limit. D . R . P a y n e D . R . P a y n e • Number of non‐grantor trusts required: Property tax divided by $10,000. Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 9 10 Federal Deduction for State Tax Paid by Pass‐ Through Entity • Tax Cuts and Jobs Act conference report at footnote 172: & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . • “ . . . Additionally, taxes imposed at the entity level, such as a business tax imposed on pass‐through entities, that are reflected in a partner’s or S Oklahoma’s Pass‐ corporation shareholder’s distributive or pro‐rata share of income or loss on a Schedule K‐1 (or similar form), will continue to reduce such partner’s Through Entity Tax or shareholder’s distributive or pro‐rata share of income as under present law.” Equity Act of 2019 • More on deduction issues in the Additional Considerations section. D . R . P a y n e D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019 Last Updated 09/09/2019 11 12 Mark O. Neumeister D. R. Payne & Associates, Inc.
Presentation for the Central Oklahoma Society of Oklahoma Pass‐Through Entity Tax Equity Act of 2019 Enrolled Agents, September 11, 2019 Pass‐Through Entity Tax Equity Act of 2019 • It is hereby declared to be the purpose of the Pass‐Through Entity & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . Tax Equity Act of 2019 to establish a revenue‐neutral mechanism to provide a more fair and simplified taxation of pass‐through entities Election and their members in this state while maintaining revenue levels for support of general governmental functions of the State of Oklahoma. [68 O.S. § 2355.1P‐3(A)] • For statute language see, 68 O.S. 2355.1P (OSCN 2019) D . R . P a y n e D . R . P a y n e • http://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=483686 Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 13 14 Election Election Details • Act provides that a pass‐through can choose each year to be an • Due date for election: & A s s o c i a t e s , I n c . & A s s o c i a t e s , I n c . “electing pass‐through entity.” • 2019 tax year • Any entity required to file an Oklahoma partnership income tax • Election due within 60 days of enactment = June 28, 2019 return (Form 514) or an Oklahoma S corporation income tax return • New entities formed after June 28, 2019 cannot meet the deadline to elect (Form 512‐S), may elect to become an electing pass‐through entity. for 2019. • Fiscal year entities must elect for 2019 by June 28, 2019 • Use Form 586—Pass‐Through Entity Election Form. • Years after 2019 • See https://www.ok.gov/tax/documents/586‐19.pdf D . R . P a y n e D . R . P a y n e • May elect anytime during the preceding tax year. • Form 586 is also used to revoke the election. • May elect within the first two months and fifteen days after the beginning • OTC has informally indicated that election can be made by using Form 586 of the tax year. or substantially equivalent notice. • Suggestion: Use the Form 586. Mark O. Neumeister Last Updated 09/09/2019 Mark O. Neumeister Last Updated 09/09/2019 15 16 Mark O. Neumeister D. R. Payne & Associates, Inc.
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