O k l O k l a h o m a h o m a P a P a s s T h r T h r o u g h u g - PowerPoint PPT Presentation

& A s s o c i a t e s , I n c . O k l O k l a h o m a h o m a P a P a s s ‐ T h r T h r o u g h u g h E n E n t i t y t i t y T a T a x D . R . P a y n e E q u i q u i t y t y A c t A c t o f o f 2 0 1 9 2 0 1 9 Mark O. Neumeister Last Updated 09/09/2019

Mark Neumeister is Director of Tax Services Ma Mark O. O. Neumei Neumeister er 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 . accountant and serves several professional 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 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 matters. Mark has volunteered his time on numerous civic and charitable activities over 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

& A s s o c i a t e s , I n c . • This presentation is provided solely for the 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. 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 • Views expressed in this presentation are not necessarily those of D. R. Payne & Associates, Inc. Mark O. Neumeister Last Updated 09/09/2019

Objectives & A s s o c i a t e s , I n c . Explore Examples Consider D . R . P a y n e Explore new Work through Consider which provisions of the example taxpayers may or Act. calculations. may not benefit. Mark O. Neumeister Last Updated 09/09/2019

Table of Contents • Background 6 • OTC FAQs 35 & 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 • Election 14 • Presentations by Mark • Impact of Election on Entity 20 Neumeister 68 D . R . P a y n e • Impact of Election on Owner 26 • Definitions 31 Mark O. Neumeister Last Updated 09/09/2019

& A s s o c i a t e s , I n c . Background D . R . P a y n e Last Updated 09/09/2019

Tax Cuts and Jobs Act of 2017 & A s s o c i a t e s , I n c . D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019

States Workaround Solutions • 1. Charitable contributions & 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 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

States Workaround Solutions • 2. State Payroll Tax & 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. • New York enacted an optional payroll tax • 3. Trusts • Use of non ‐ grantor trusts to skirt the $10,000 limitation. • 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 • Number of non ‐ grantor trusts required: Property tax divided by $10,000. Mark O. Neumeister Last Updated 09/09/2019

States Workaround Solutions • 4. Entity Level Tax & A s s o c i a t e s , I n c . • Several states have enacted entity level taxes on pass ‐ through entities, with corresponding state tax credit to owners. • Connecticut in 2018 became the first state to enact a SALT deduction cap workaround involving an entity ‐ level tax on passthroughs and an offsetting personal income tax credit for entity members. D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019

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 . • “ . . . 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 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 or shareholder’s distributive or pro ‐ rata share of income as under present law.” • More on deduction issues in the Additional Considerations section. D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019

& A s s o c i a t e s , I n c . Oklahoma’s Pass ‐ Through Entity Tax Equity Act of 2019 D . R . P a y n e Last Updated 09/09/2019

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 . Tax Equity Act of 2019 to establish a revenue ‐ neutral mechanism to provide a more fair and simplified taxation of pass ‐ through entities 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 • http://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=483686 Mark O. Neumeister Last Updated 09/09/2019

& A s s o c i a t e s , I n c . Election D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019

Election • Act provides that a pass ‐ through can choose each year to be an & A s s o c i a t e s , I n c . “electing pass ‐ through entity.” • Any entity required to file an Oklahoma partnership income tax return (Form 514) or an Oklahoma S corporation income tax return (Form 512 ‐ S), may elect to become an electing pass ‐ through entity. • Use Form 586—Pass ‐ Through Entity Election Form. • See https://www.ok.gov/tax/documents/586 ‐ 19.pdf D . R . P a y n e • Form 586 is also used to revoke the election. • OTC has informally indicated that election can be made by using Form 586 or substantially equivalent notice. • Suggestion: Use the Form 586. Mark O. Neumeister Last Updated 09/09/2019

Election Details • Due date for election: & A s s o c i a t e s , I n c . • 2019 tax year • Election due within 60 days of enactment = June 28, 2019 • New entities formed after June 28, 2019 cannot meet the deadline to elect for 2019. • Fiscal year entities must elect for 2019 by June 28, 2019 • Years after 2019 D . R . P a y n e • May elect anytime during the preceding tax year. • May elect within the first two months and fifteen days after the beginning of the tax year. Mark O. Neumeister Last Updated 09/09/2019

Election Details (continued) • Election made during the entity’s taxable year but after the two & A s s o c i a t e s , I n c . month and fifteen ‐ day date, such election is then effective on the first day of the next tax year. • Any election is binding until revoked. • Elections are binding on the electing entity only. Other (related) pass ‐ through entities must make their own elections. I.e., each pass ‐ through entity makes elections under this Act independently. D . R . P a y n e • According to OTC, approximately 8,900 entities made the election by the June 28, 2019 deadline. Mark O. Neumeister Last Updated 09/09/2019

Revocation of Election • Due date for revocation: & A s s o c i a t e s , I n c . • 2019 tax year • Revocation can be made within 60 days of enactment = June 28, 2019 • Fiscal year entities must make revocation for 2019 by June 28, 2019 • Years after 2019 • May revoke anytime during the preceding tax year. D . R . P a y n e • May revoke within the first two months and fifteen days after the beginning of the tax year. • Effectively, an entity can choose each year to be subject to the tax or not. Mark O. Neumeister Last Updated 09/09/2019

More on the Election • Form 586 (or equivalent) must be signed by an authorized person. & A s s o c i a t e s , I n c . • Electing entity will receive from OTC an acknowledgement letter • Example of letter: • Each electing pass ‐ through entity must provide their shareholders, partners, or members a copy of the OTC acknowledgement letter. D . R . P a y n e • Each entity must advise the shareholders, partners, or members to attach a copy of the acknowledgement letter to their Oklahoma income tax return. • The electing pass ‐ through entity must attach the OTC acknowledgement letter to their Oklahoma income tax return. Mark O. Neumeister Last Updated 09/09/2019

& A s s o c i a t e s , I n c . Impact of Election on Entity D . R . P a y n e Mark O. Neumeister Last Updated 09/09/2019