Another Tax Reform and Relief Legislative Task Force recommendation has been introduced into the General Assembly: an elective passthrough entity tax. HB 1714 could potentially provide federal income tax relief to business owners who can no longer deduct state income taxes at the individual level, at least for tax years beginning on or after January 1, 2020.
The Arkansas Pass-Through Entity Tax would be a tax imposed on "the aggregate net taxable income of each of the members of an affected business entity," and that "affected business entity" would be liable for the tax. Partnerships, limited liability companies, and S corporations could elect to be subject to the tax. The tax would be a flat tax using the top individual rate. The intent is that members of an electing passthrough entity would exclude their share of the passthrough entity income that was subject to the entity-level tax. (Some wording adjustments may be added by amendment to clarify this.) The election would be made by members comprising more than 50% of the voting rights in the passthrough entity.
Arkansas is following in the footsteps of Connecticut and Wisconsin, which have enacted passthrough entity taxes. In general, Arkansas HB 1714 hews closer to the Wisconsin model with the entity-level tax being elective and then providing an exclusion at the individual taxpayer level.
The sponsors of HB 1714 are Representative Jett and Senator Dismang, the respective Chairs of the House and Senate Revenue and Tax Committees. The bill may move quickly.
If HB 1714 is enacted, Arkansas passthrough business will need to consult with their tax advisers about the appropriate course of action. The validity of elective pass-through entity taxes as a way to preserve the benefit of the federal SALT deduction has not been clearly established, and taxpayers would need to weigh their federal benefits and risks in addition to their state income tax analysis. At least with the delayed effective date until tax years beginning on or after January 1, 2020, there will be plenty of time to do so.