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Richard Bell has been trying to get something like House Bill 1209 enacted in Arkansas for a couple of years, and a favorable opinion from the IRS gives state Rep. Joe Jett confidence that 2021 is the year.
The Elective Pass-Through Entity Tax Act sounds ominous, but backers like Bell, founder of the Bell & Co. accounting firm in North Little Rock, and the Arkansas State Chamber of Commerce say it will save businesses organized as S-corporations and partnerships $50 million or more in federal income tax while sending at least $4 million more to the state government.
It would do this by creating a voluntary mechanism for these businesses, which currently “pass-through” taxable income to their owners for taxation as personal income, to avoid the $10,000 limit on deductible state and local taxes that was part of the 2017 federal tax bill.
Instead of treating business income as personal income, HB1209 would give these owners the option of paying state income tax at the corporate level. And those state business taxes would be fully deductible from federal income tax; the $10,000 “SALT” cap only applies to state and local taxes deducted from personal income.
Bell described the bill as a “win-win” for the state and businesses, whose effective federal income tax rate could be reduced by approximately 2 percentage points. The loser would be the federal government, which until December had not given its blessing to the strategy even though seven states had already altered their state tax codes to allow it.
Two of Arkansas’ neighboring states, Oklahoma and Louisiana, are among the states that already allow pass-through entities to pay business income taxes, while two others, Texas and Tennessee, have no personal income taxes in the first place.
“I’m saying Arkansas needs to get on board,” Bell told Arkansas Business on Monday. “We should have done it two years ago.”
An analysis by the state Department of Finance & Administration estimated that some 6,000 partnerships and 11,750 S-corps would opt to pay the pass-through entity tax. The benefit to the state from that many businesses choosing to pay what might be a slightly higher business tax would be $4.24 million.
The State Chamber’s analysis concluded that more than twice as many businesses — about 40,000 — would benefit from the bill. More pass-through entities opting to pay the business income tax would increase the benefit to the state, according to the DF&A analysis.
Bell said he thought the tax option would be attractive to pass-through entities of all sizes. “The nice thing about this is it does not discriminate between a company that has large taxable income and small taxable income because they can all take the [state and local tax] deduction based on all the taxes they owe.”
More Tax Bills Coming
Jett, a Republican who represents Clay County and portions of Greene, Randolph, and Lawrence counties, is chairman of the House Revenue & Taxation Committee. He told Arkansas Business that he is preparing to introduce additional tax-related legislation:
Tax forgiveness for 2020 and 2021 for the 286,000 Arkansans who have thus far received more than $2.5 billion in state and federal unemployment benefits;
Two more bills that would, in combination, create an independent Tax Fairness Commission to hear disputes between taxpayers and the DF&A. Jett plans to propose that three commissioners would be appointed by the governor from nominees recommended by the Arkansas Bar Association, the Arkansas Society of CPAs and a majority of the Arkansas Supreme Court.