Addendum – Estimated Tax Payments: Mississippi Follows the National Pass-Through Entity Tax Election Trend — Start Now to Make a 2022 Tax Election

Addendum – Estimated Tax Payments:  Just after our article went to press, we received some informal guidance from the DOR regarding estimated tax payments that presents a bit of a conundrum for those considering the PTE election.  As explained below, it may be necessary to make duplicate estimated payments at both the entity and partner/member level to avoid estimated tax penalties.

If an entity is contemplating making the election for the 2022 tax year (due no later than March 15, 2023 for most entities), the PTE needs to be making estimated payments now at the entity level to avoid estimated tax penalties.  At this time, however, many of those eligible companies have not decided whether to make the election, don’t have the benefit of the full year’s financial results to enable them to quantify any benefits, and almost certainly haven’t taken the necessary internal votes to qualify.

DOR indicated informally that they will likely waive any penalties that might apply for having failed to make entity-level Q1 and Q2 estimated payments due to the effective date of the legislation and the lack of an election mechanism at that time.  Penalties related to the failure to make entity-level estimates for Q3 and Q4, however, may be more difficult to abate.

The practical problem is that in the event a PTE election is not made, to avoid their own penalties the partners/members should be making their own estimated payments based on the possibility that the PTE income could be taxed at their level and included in their returns as in prior years.  It is very unlikely that DOR will “move” estimated payments from an individual account to an entity account to avoid double payment and/or penalties, which means refund claims will be likely at one level or the other once the final filing position is determined and liability is calculated.

Finally, while the election form is not yet available on the DOR’s site, they indicated that an online election can be made now via the company’s TAP account for those interested.

Mississippi Follows the National Pass-Through Entity Tax Election Trend — Start Now to Make a 2022 Tax Election

This year, a number of state legislatures considered and passed legislation that creates a pass-through entity (PTE) tax as a workaround to the $10,000 cap on the state and local tax (SALT) itemized deduction. Nearly 30 states have enacted a PTE tax. Mississippi is one of the more recent states to join the ranks.

Beginning with this tax year, Mississippi will allow PTEs to elect to pay tax at the entity level rather than at the individual partner/member level. (See prior coverage here.) This election, passed in the 2022 Legislative Session, is designed to mitigate the impact of the federal limitation on itemized deductions for SALT. The Department of Revenue (DOR) recently issued Notice 08-22-001 to clarify several important election and compliance issues, but some uncertainty still exists as to exactly how the election will work.

PTEs contemplating the election should begin that process now in order to take the appropriate internal actions within the election time limits and to resolve any compliance issues or questions that are not addressed by the original bill or the DOR’s recent notice.

When and how to make an election

The election must be made on or before the 15th day of the third month following the close for the tax year for which the entity elects to be taxed as an electing PTE. This means most eligible entities will have until March 15, 2023, to make the election with respect to the 2022 calendar tax year. No election was available for the 2021 tax year because the legislation was not passed until after the election deadline for that year had passed.

The DOR will provide a new Pass-Through Entity Election Form, Form 84-381, which must be submitted within the applicable time period, but that form does not appear to be available on the DOR’s website at this time. Once made, the election shall be binding for the taxable year and all subsequent taxable years unless the election is revoked by the electing PTE by the same process and voting threshold used for making the election.

What vote is necessary for approval?

To make or revoke an election, there must be “a vote by or written consent of the members of the governing body of the entity as well as a vote by or written consent of the owners, members, partners or shareholders holding greater than fifty percent (50%) of the voting control of the entity, within the time prescribed in this subsection” (emphasis added). Thus, the approval must be made at two levels: Even though management decisions may be centralized in a board or other governing body, the latter vote must pass by a specified threshold and both votes must take place within a specified time frame.

It is important to note that this statutory election requirement supersedes and may be inconsistent with the voting rights and thresholds provided under an entity’s governance documents. For example, it is common for certain important elections to be approved by more than a 50% vote of the members, or that different members might have different voting or consent rights on those types of issues. Additionally, a strict reading of the statute may also pose questions regarding whether a simple manager governance structure constitutes a centralized board or “other governing body.” It also remains unclear how this election provision will operate in a tiered structure containing multiple PTEs, specifically whether the owner-level exemption is contingent on a tax payment having been made by that immediate PTE as opposed to one further up the chain.

Unfortunately, Notice 08-22-001 does not address or resolve these questions. Any entity whose governance structure might be inconsistent with these requirements should contact the DOR now, well in advance of the election deadline, to discuss what internal votes and approvals will be acceptable.

What returns will be filed?

Electing entities will file the Pass-Through Entity Tax Return, Form 84-105, but will check the “Electing Pass-Through Entity” box in order to be taxed at the entity level. The updated return form does not appear to be available on the DOR’s website at this time. A copy of the Pass-Through Entity Election Form, Form 84-381, should also be attached to the return. The Mississippi Schedule K-1, Form 84-132, for each owner, member, partner, or shareholder of the electing entity is also required to be attached to the return. The K-1s should have the “Electing Pass-Through Entity” box checked with the amount of tax paid by the electing entity for each partner provided on the K-1s.

Factor election into individual and entity estimated tax payments

The members of any electing PTE should adjust their estimated tax payments to reflect that those taxes will be paid at the entity rather than the individual level. The entity will now be required to make estimated payments if it has an annual income tax liability in excess of $200.

Estimates are due on or before the 15th day of the fourth, sixth, ninth, and 12th months of the income year and generally correspond to the federal deadlines. Payments should be submitted using the Pass-Through Entity Income Tax Voucher, Form 84-300. Estimated tax payments must not be less than 90% of the annual income tax liability. Any taxpayer that fails to file a return and pay the tax by the due date of the return or that underestimates the required amount could be liable for a penalty of 10% plus interest of 0.5% per month on underpayment of tax from the payment due date until paid or until the next payment due date, whichever is earlier.

Notice 08-22-001 recognizes that there may be complications with some of the early estimated payments. Any electing entity that receives a penalty notice for an underestimate on their 2022 first- and second-quarter estimated payments should contact the DOR to request abatement of any proposed penalties.

Does the election impact composite returns?

If an entity elects to pay tax at the entity level, it will no longer need to file a composite return. An entity cannot file as both. Per Notice 08-22-001, composite returns can be filed only on behalf of nonresident partners with no other activity in Mississippi other than that from the PTE. Once an entity begins to file a composite return, it must continue to file in that manner unless permission to change has been granted by the DOR or an election to file as an electing entity has been made.

Mechanics of the credit for taxes paid at the entity level

Each member of an electing PTE will receive and may claim a pro rata credit for any income taxes paid at the entity level. That credit will be reported on the member’s Mississippi K-1, which must be attached to the member’s return similar to that required for traditional claims for credits for taxes paid to other states. Mississippi will allow the members to claim similar entity-level taxes paid to other states as long as the appropriate support is included with the return. The failure to attach these forms historically has resulted in delayed processing of returns, temporary denials of refunds, and, in some cases, the issuance of assessment notices due to the disallowance of claimed but unsupported credits.

Notice 08-22-001 provides that “partnerships, S corporations or similar pass-through entities that are owners, members, partners or shareholders of an electing PTE can also take a tax credit for taxes paid on the electing PTE return on their separate Mississippi Pass-Through Entity Tax Returns, form 84-105.” Noticeably absent from the guidance is any reference to whether or how a corporate owner can claim that credit. Thus, it remains unresolved whether the income distributable by an electing PTE to a corporate owner will be exempt as well as that received by individuals. If not, the election could result in double taxation of that income at the PTE and corporate member levels.

Other questions still remain

In our original coverage of the legislation, we identified several important questions that were not addressed by the original bill, some of which are noted above. Unfortunately, Notice 08-22-001 leaves unresolved the question of whether paying tax at the entity level will sever nexus for any corporate owners whose sole contact with the state is via that PTE. Also not addressed is the impact of the election on a member’s basis calculation. The basis rules contained in the legislation should help minimize federal/state differences in gain or loss calculations on a sale of an ownership interest, but that issue has not been addressed officially at this point.

It is possible, perhaps likely, that the DOR will issue additional guidance on some of these and other questions before the election deadline passes in March. Jones Walker will continue to monitor and report on any developments in this area.

John F. Fletcher is a partner in Jones Walker’s Tax Practice Group. He can be reached at jfletcher@joneswalker.com or 601.949.4620.

 

Jones Walker Presents Annual State & Local Tax Seminar in Houston, TX on September 20

The Jones Walker LLP State and Local Tax Team is back live and in-person with a day-long program on September 20, 2022, titled Jones Walker: Gameshow! This state and local tax workshop will address all the relevant issues that have been picked up for a new season, as well as discuss and preview all the new additions to the lineup. First, you will be guided through the Wheel of “Mis”Fortune of state and local tax procedure. Then, get ready to deal with all the legislative and administrative updates that are grabbing the attention of viewers. Next, we will let you confront your software fears.

Join us at lunch for Whose Line Is It, Anyway?, featuring a moderated panel of key state tax administrators from Louisiana, Mississippi, Texas, and Alabama. The administrators will provide their perspective on recent tax developments.

  • Jennifer Burleson, Director, Tax Policy Division, Texas Comptroller of Public Accounts
  • Chris Graham, Commissioner, Mississippi Department of Revenue
  • Mary Martin Mitchell, Acting Director, Tax Policy and Governmental Affairs Division, Alabama Department of Revenue
  • Kevin Richard, Secretary, Louisiana Department of Revenue
  • Arthur Parham, Moderator, Retired General Tax Advisor – Entergy

Next, it’s time for Jeopardy! with an interactive game addressing various recent hot SALT topics. We’ll then check out SALT case updates, Family Feud-style. Finally, we will give a report of the national SALT battles raging across the country. Afterwards, we’ll wrap things up with a Q&A.

Click here for the full agenda.

When: Tuesday, September 20 | 8:00 am – 5:30 pm

Where: Hilton Americas-Houston | 1600 Lamar St | Houston, TX 77010

Fee: $150 per registrant
Company group rate: $150 for first registrant, $100 for each subsequent registrant

Questions or to Register: Contact Courtney Farley at cfarley@joneswalker.com

This program is intended for tax professionals with starter to advanced state & local tax experience and those doing business in Louisiana, Mississippi, Alabama, and along the Gulf Coast. Program not open to tax collectors. An application for accreditation of this activity has been submitted to the Mandatory Continuing Legal Education Committee of the Louisiana Supreme Court and is pending. An application for accreditation of this activity has been submitted to the MCLE Committee of the State Bar of Texas and is pending. The full program has been recommended for 9 hours of Texas and Louisiana CPE.

It’s That Time of Year Again! The Property Tax Rolls Will Soon Open For 2022 (2023 For Orleans Parish)

Like that much anticipated annual visit to the doctor before school starts, it is again time for Louisiana assessors to open their rolls for taxpayer review, and hopefully no one will need any shots afterwards (but if so, make it tequila!). Many assessors begin the two-week exposure period on August 15th, but the dates vary by parish. As such, if you want to review the fair market value placed on your property by an assessor in a particular parish, you can find the open book dates on the Louisiana Tax Commission’s website.

Below is a brief refresher on the basics of appealing the assessed value of a property:

  • Visit the assessor’s office during the open book dates and provide any data that supports your opinion of the property’s value, including any evidence of functional or economic obsolescence.
  • If no resolution with the assessor is possible, file an appeal with the local Board of Review (typically, the Police Jury or Parish Counsel) using the provided form 3101. The form can be found on the Commission’s website.
  • Attend the Board of Review hearing, again the dates of the hearing in each Parish vary and can be found on the Commission’s website.
  • Upon receipt of the Board of Review’s decision, if still unsatisfied, file an appeal with the Commission on the provided form 3102. The form can be found on the Commission’s website.
  • Once docketed at the Commission, a taxpayer can set the matter for hearing, or conduct any necessary pre-hearing discovery that it believes is necessary prior to a hearing.

One very important practice tip relates to La. R.S. 47:1989, the statutory basis for review of appeals by the Commission. The statute has been revised to require taxpayers to provide all “evidence” that the taxpayer intends to present at a “correctness” challenge before the Commission to the assessor prior to the close of the deadline for filing an appeal with the local Board of Review. The Commission can allow additional evidence if the Commission concludes that the additional evidence is material and there was good reason for the taxpayer’s failure to present it to the assessor (i.e., it was not available at the deadline). If a taxpayer decides to hire an appraiser or other expert to provide an appraisal or other report, that work does not have to be completed by the Board of Review deadline. The statute directs that good reason for the failure to timely present the expert’s work product “shall be” presumed, if any report or appraisal is provided to the assessor within thirty (30) days of the taxpayer’s receipt of the expert report, and at least twenty-five (25) days prior to any hearing before the Commission. In addition, the statute lists other types of publicly available evidence that is considered to always be admissible. See La. R.S. 47:1989(c)(2)(a)(xi).

Because an appeal of the assessment must be lodged with the local Board of Review seven (7) days prior to the public hearing, a taxpayer does not have a large window of opportunity to provide evidence to the assessor as required by the above-referenced statutes. If you believe that a correctness challenge is possible for 2022, it is imperative that any evidence that will support your opinion of the fair market value of the property be gathered as soon as possible for submission to the assessor.

Should you have any questions regarding the foregoing, please contact Jay Adams, 504-582-8364 or via email at jadams@joneswalker.com.

Jeffrey Birdsong presents to the New Orleans Chapter of the Association of Legal Administrators (ALA)

Jeffrey Birdsong, an associate on the state and local tax team, presented to the New Orleans Chapter of the Association of Legal Administrators (ALA) on July 21.

Jeff’s presentation, “State and Local Tax Issues Related to Remote Work in Other States,” covered the state and local tax issues that law firms with employees working remotely in other states should consider, and addressed income sourcing and payroll tax withholding, apportionment, and best practices.

Jones Walker’s SALT Team was a proud sponsor of the Southeastern Association of Tax Administrators (SEATA) Annual Conference

Jones Walker’s state and local tax team was a proud sponsor of the Southeastern Association of Tax Administrators (SEATA) Annual Conference on July 10-13, in Norfolk, Virginia. Matthew Mantle, a partner on the state and local tax team, attended on behalf of the firm. SEATA promotes cooperation and the exchange of ideas between Southeastern states in taxation and tax related matters.

For more information about the event’s speakers and presentations, click the link below.
https://bit.ly/3JuDsCX

John Fletcher Quoted in Law360 and TaxNotes on Mississippi Proposed Tax on Cloud Computing Services

Jones Walker SALT partner, John Fletcher, was quoted in the Law360 article “Miss. Pulls Proposed Rule To Tax Cloud Computing Services – Law360” as well as the Tax Notes article “Mississippi Revokes Proposed Sales Tax Reg for Online Computing Services.” Referring to the Mississippi Department of Revenue’s recently withdrawn rule change that would have applied sales tax to cloud computing services, John notes that the rule change was likely withdrawn in order to focus on the newly formed committee, which will meet to study and offer recommendations on the issue for the next legislative session.

LexBlog