Hawaii, Missouri, and Rhode Island Amend Pass-Through Entity Taxes

At a glance

• The main takeaway: Hawaii, Missouri, and Rhode Island enacted important legislative changes to each state’s pass-through entity tax.
• Assess the impact: If your business is considering making a pass-through entity election, it’s crucial to understand the potential benefits and pitfalls.
• Take the next step: Aprio’s State and Local Tax (SALT) team can guide you through the complex rules of pass-through entity taxes.

Schedule a free consultation today to learn more!

The full story

Hawaii, Missouri, and Rhode Island passed legislation that will make significant changes to each state’s pass-through entity tax (PTET). Below is a summary of PTET changes made by each state’s legislation and how they with impact pass-through entities (PTEs) and their owners.

Hawaii

On June 19, 2024, Hawaii Governor Josh Green signed Senate Bill 2725 into law, which made several changes to the state’s PTET that apply to tax years beginning on or after January 1, 2024.  On August 15, 2024, the Hawaii Department of Taxation published administrative guidance addressing the legislation.[1]

• The terms “direct member” and “indirect member” were removed and replaced with the term “qualified member.” This new term is defined as a “member of an electing pass-through entity that is an individual, trust, or estate.”
• The PTET rate has been changed from the “highest rate of tax applicable to individuals” to a flat rate of 9%. In addition, the income subject to PTET includes only the distributive shares and guaranteed payments of “qualified members.” The prior legislation had only excluded amounts flowing to corporations, but now any income in respect of a member that is a partnership or S corporation will also be excluded.  The state’s guidance explains that PTEs that do not have a “qualified member” are not eligible to make a PTET election, and any PTE that has already done so or made PTET estimated payments for 2024 should contact the Department of Taxation.
• A “qualified member” whose PTET credit exceeded such member’s Hawaii income tax liability will now be allowed to carry forward and use such excess in subsequent years until exhausted. Previously, any excess credit amount was not allowed to be carried forward.

Missouri

On July 12, 2024, Missouri Governor Mike Parson signed House Bill 1912 into law, which made several changes to the state’s PTET that became effective on August 28, 2024.

• For purposes of calculating income subject to PTET, the legislation removes the federal business income deduction under Internal Revenue Code Section 199A and replaces it with the state’s business income deduction under Missouri Code Section 143.022.
• A publicly traded partnership is now excluded from being able to make a PTET election.
• Members of a PTE that have elected to pay PTET may now elect to opt-out to exclude their income/loss from being included in the electing PTE’s income. The opt-out election is considered timely made for the tax year, and all subsequent tax years, if it is filed before or in conjunction with the annual tax return for such tax year. If a member does not make an opt-out election for a tax year, such members are not precluded from making an opt-out election in a subsequent tax year.
  • If the member making the opt-out election is a nonresident, such member must (i) agree to file a tax return for such tax year and pay all taxes with respect to the income of the electing pass-through entity and (ii) consent to the personal jurisdiction of the state for the collection of all taxes, penalties, and interest with respect to the income of the electing PTE.
• Members of an electing PTE who are estates or trusts are allowed the PTET credit.

Rhode Island

On June 17, 2024, Rhode Island Governor Daniel McKee signed House Bill 7225 into law.  As a result of that legislation, Rhode Island joins two of its New England neighbors — Connecticut and Massachusetts — that do not provide members of an electing PTE with a 100% credit for PTET paid. For tax years beginning on or after January 1, 2025, members of an electing PTE will only be allowed a PTET credit equal to 90% of the Rhode Island PTET paid by the electing PTE.

The bottom line

Aprio’s SALT team has experience with every state’s PTET, and we can assist your business in understanding the potential benefits and pitfalls of making a PTET election. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

---

[1] Hawaii Tax Administration Release No. 2024-01 (August 15, 2024).