The Tax Reform Act of 2018 limited the amount an individual who itemizes deductions can deduct for state income taxes and real estate taxes to $10,000. For example, if you paid $8,000 in state income taxes and $7,500 in real estate taxes, you may only deduct $10,000 on your individual income tax return.
Oklahoma recently enacted a law which creates a method for pass-through businesses to avoid the $10,000 limit on individual deductions for state and local taxes. The new “workaround” law allows pass through entities such as partnerships and “S” corporation to make a written election to pay and deduct state income taxes at the entity level, thereby circumventing the $10,000 limitation.
Once the election is made, the pass through entity will be taxed on its Oklahoma income at the pass through entity level instead of at the individual level (as in the past). Because of this, the tax will be deductible on the pass through entity’s own federal income tax return. This is particularly beneficial for business owners that have already met the $10,000 state tax cap on their individual returns or qualify for the increased standard deduction.
For example, if your partnership or “S” corporation has net income of $50,000 which will be reported on your individual return you can elect to have the partnership or “S” corporation pay the 5% tax and deduct it. The income will then not be subject to Oklahoma income tax on your individual return.
The law is modeled after similar laws enacted in Connecticut and Wisconsin in 2018. Although the Internal Revenue Service has moved to disallow workarounds that rely on providing a state tax credit for individuals who make contributions to state-sponsored or created charities, it has been silent on the types of programs enacted by Connecticut and Wisconsin. Although this law is full of uncertainties and lacks much guidance, it is important to discuss its impact on your individual situation.
THE ELECTION MUST BE MADE ON OR BEFORE JUNE 28, 2019, FOR TAX YEAR 2019 AND CANNOT BE REVOKED.
If you wish to consider making this election, please call to discuss the various ramifications. For your convenience we have enclosed the election form.