Oklahoma Creates State, Local Tax Deduction Workaround

On April 29, 2019, Oklahoma’s governor signed into law H.B. 2665, http://webserver1.lsb.state.ok.us/cf_pdf/2019-20%20ENR/hB/HB2665%20ENR.PDF, which creates a method for pass-through businesses to avoid the $10,000 limit on individual deductions for state and local taxes.

The new law establishes an optional entity-level 5% tax beginning in tax year 2019, with an offsetting income tax exclusion for the entity’s members.  The result is that a fully deductible state tax will be paid at the entity level, with a corresponding reduction in state tax at the individual member level.  Entities such as partnerships, LLCs, or S corporations can take advantage of the provision.

The program is modeled after similar programs 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, and the weight of professional opinion is that those programs are effective to avoid the $10,000 deduction limit.

How This Impacts Mobility

Worldwide ERC® members organized as pass-through entities in states adopting these programs could save gross-up dollars for transferees in those states. 

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