HB 1668 – Pass-Through Entity Election
House Bill 1668 revises the pass-through entity (“PTE”) tax election which was originally passed into law last year. The original bill was an effort to circumvent the $10,000 cap on an individual’s state and local tax deductions for federal tax purposes. The original bill had some glaring issues which led the Mississippi Society of CPAs (MSCPA) to work hand in hand with the Mississippi Department of Revenue and several key legislators to revise the law. The original law allowed a partnership, S-Corp, or other PTE to elect to pay tax at the entity level. This allowed the partners, members, and owners to receive a credit for tax paid by the entity.
HB 1668 addressed the following issues:
- The original law required a vote by the governing body of the PTE to allow for the election. It quickly became apparent that not all PTEs had a governing body. As a result, HB 1668 clarified the language in the law so that a vote of the members/partners/owners would be sufficient for the PTE to make the election.
- Eliminated language relating to a taxpayer being exempt from the taxes due to its distributive share of income from the PTE. This language was unnecessary and could have been seen as a double benefit because the taxpayer was also being allowed a credit for tax paid at the entity level.
- Clarified that the credit for tax paid would be based on the actual tax paid by the PTE, and any business credits earned by the PTE would be passed through to the members/partners/owners and applied at the individual level. This resolves an issue where the members/partners/owners would not receive any benefit from the business credits.
- Finally, HB 1668 allows for the excess of credits for tax paid at the PTE level over tax due at the individual level to be refunded or carried forward at the election of the taxpayer.
This bill is effective for all returns filed after January 1, 2023.
https://www.dor.ms.gov/node/15647
What this means for your business
The PTE election is intended to circumvent the $10,000 cap on the state and local tax deduction on individual federal income tax returns. The intent is to allow a pass-through entity to pay the tax at the entity level, resulting in lower income being passed through to the members/partners/owners.
There are still some remaining issues. There could be cash-flow issues associated with the election. If a PTE makes the election, it will have to pay the tax and the partners will receive the [credit for taxes paid on their behalf]. The PTE will have to have available cash flow in order to pay the tax. The issue is compounded if the entity has business credits such as Ad Valorem or Jobs Tax Credits. Because the credits are applied at the entity level, partners will likely receive refunds because the PTE will remit tax without taking into account the credits.
The Mississippi Department of Revenue (“MSDOR”) released guidance as well as FAQs on their website on April 5, 2023. In the FAQs, the MSDOR states that non-resident members/partners/owners will not be required to file a MS return if there is no other activity in the state and there is no liability. However, if the member/partner/owner wishes to receive a refund, they will be required to file a return. Because of the discrepancy between the corporate and individual tax rates, the election will almost always result in a refund for non-resident individuals with no other activity in the state. The same is true if non-resident individuals made estimated payments. Because of these issues, most non-resident individuals will need to file a Mississippi non-resident return in order to claim a refund.
SB 2449 – Taxation of Software
Another highly contested topic is the taxation of software. Last year, the MSDOR issued proposed regulations that could have resulted in software being taxed regardless of where the servers housing the software were located. In response, the MS Legislature created a committee to study the effects of the proposed regulation and to make recommendations to the legislature on how to address software taxation moving forward. As a result, Senate Bill 2449 was introduced and passed essentially striking down the proposed regulation and ensuring that software continued to be taxed as it had in the past.
What this means for your business
This means you won’t have to pay any tax that you weren’t already required to pay on software and software services. The law simply nullifies the proposed regulations submitted by the MSDOR. This should have no material impact on your business.
HB 1733 – Bonus Depreciation
HB 1733 brings state tax law into conformity with the federal law regarding accelerated depreciation on qualified business property, qualified improvement property, and certain research and development expenditures. Currently, Mississippi does not recognize accelerated depreciation and requires an addback to Mississippi taxable income for any bonus depreciation taken on the federal return. This bill will now allow businesses in Mississippi to take advantage of accelerated depreciation. This treatment is effective for assets placed into service after 12/31/2022.
What this means for your business
Beginning with 2023 tax returns, your business may be eligible to use accelerated depreciation for Mississippi tax purposes. This typically results in current lower taxable income and, in turn, current lower tax due.
HB 549 – Sales/Use Tax Treatment of Equipment Moved Out of State
HB 549 clarifies the sales/use tax treatment of equipment manufactured in Mississippi for out-of-state customers when the customer enters Mississippi to get training for the equipment or to inspect the equipment before transport out-of-state. This bill clarifies that sales/use tax is only due to the state where the equipment is registered and used.
What this means for your business
This bill should only affect manufacturers that sell to out-of-state customers. This bill provides clarity that the provision of in-state training and other ancillary activities provided to out of state customers should not create a Mississippi sales tax collection obligation on sales of manufactured
