Like many states, Oklahoma has implemented a workaround for the State and Local Tax (SALT) deduction cap for owners of pass-through entities (PTEs). This is aimed at giving business owners relief from the $10,000 federal SALT deduction cap imposed by the Tax Cuts and Jobs Act (TCJA) of 2017. Here’s an overview of how Oklahoma’s PTE election works and how it compares with Kansas.
Oklahoma PTE and SALT Workaround
In Oklahoma, pass-through entities such as S-Corporations, partnerships, and LLCs can elect to pay state income tax at the entity level rather than passing income and taxes through to individual owners. Here’s how it works:
- Entity-Level Taxation: The PTE (such as an LLC or S-Corp) makes an election to pay state taxes on behalf of its owners at the entity level. This allows the business to deduct state tax payments as a business expense on its federal return, bypassing the $10,000 SALT cap for individual taxpayers.
- Flow to Individual Owners: The taxes paid by the PTE are then credited to the individual owners on their Oklahoma state tax return, reducing the personal state tax liability.
- Eligibility and Timing: Oklahoma’s PTE election must be made annually by a specified deadline, typically when filing the entity’s state income tax return.
Kansas PTE and SALT Workaround
Kansas introduced a similar PTE election to help business owners overcome the SALT cap. While both states allow for entity-level taxation as a workaround, there are some nuances in how the two states handle the election and reporting.
- Entity-Level Election: Like Oklahoma, Kansas allows pass-through entities to elect to pay state taxes at the entity level, with the state tax being deductible on the federal return. The income still flows through to the owners, but they receive a credit for the taxes paid by the entity.
- Reporting Differences: One key difference is that Kansas has stricter rules around the eligibility of the PTE election. Kansas law ensures that taxes paid by the entity are reported in full on the Kansas K-40 individual tax return, allowing for a smooth flow of deductions and credits. Oklahoma’s reporting rules are slightly more flexible but require the entity to handle the election and tax payments correctly to ensure credits are applied to the individual’s state return.
- Rates and Deadlines: Both states offer similar benefits, but deadlines and rates can differ. It’s important for PTEs to check with the Oklahoma Tax Commission or Kansas Department of Revenue to make sure the election is made properly each year.
Comparing Oklahoma and Kansas
- Entity-Level Election: Both states allow PTEs to elect to pay taxes at the entity level, which bypasses the SALT cap, making it beneficial for business owners.
- Flow of Credits: In both states, credits for taxes paid at the entity level flow to the individual owner’s state tax return.
- Deadlines and Reporting: Differences in reporting rules and deadlines exist between the two states, requiring careful management of tax filings in each jurisdiction.
Conclusion
Both Oklahoma and Kansas have taken steps to help business owners mitigate the impact of the SALT cap through entity-level taxation, making it essential for business owners to understand the rules in their respective states. Working closely with a CPA can help ensure compliance and maximize the tax benefits available under these PTE elections.
Let me know if you’d like more details on specific aspects of either state’s system or need assistance with your tax planning!
Written with ChatGPT