MSCPA Taxation Committee met with the Mississippi Department of Revenue (MDOR) in mid-December to discuss various topics and issues requested from the membership.

Pass-Through Entities (PTE) issues related to MDOR’s handling of tax credits was of utmost importance. MDOR was presented detailed information and examples supporting our points of contention to which they requested additional time to review. MDOR released updated FAQs on March 4 addressing these issues:

For entities that have multiple layers of ownership, can the credit for taxes paid be passed through different layers of ownership to the end partners?
Yes, the credit for taxes paid can be passed through to different entities/owners on K-1s through multiple layers of ownership to their end partners on the tax return(s) where the income of the electing pass-through entity is ultimately filed and paid.

Are incentive credits considered payments of income tax?
No, incentive credits are not considered tax payments. Incentive credits are statutorily authorized and are based on an action(s) of the taxpayer. These types of credits include, but are not limited to, employment credits, ad valorem credits, and charitable contribution credits.

MSCPA COMMENTS
Multiple Layers:
MDOR is agreeing that the PTE credit generated by cash payments of income tax can pass through multiple layers of electing PTEs. So, if the first-tier entity pays a tax in cash, that income and a credit for the tax paid flows through to the second-tier entity. The second-tier entity reports the income and then pays the tax by application of its share of the PTE credit generated by the first-tier entity’s cash payment. MSCPA has confirmed that MDOR feels this is consistent with the language of the statute mandating a credit for “taxes paid” by an electing PTE.

Incentive Credits:
In contrast, MDOR draws a distinction for incentive credits by NOT recognizing them as tax payments because they are not cash payments of income tax. MSCPA argues that this treatment is contrary to specific IRS guidance on credits for payments to charities and also results in the PTE credit statute being applied in a way that is contrary to legislative intent. In this situation, consideration could be given to having an electing PTE flow all incentive credits out pro rata to its owners to ensure the full and distinct PTE credit also flows out. In light of this guidance, taxpayers with assessments based on disallowance of incentive credits claimed at the entity level will either have to negotiate resolution based on amended returns or litigate MDOR’s interpretation.

MSCPA has fielded numerous comments and questions related to the proper treatment of the electing PTE legislation and related FAQs and will continue to advocate for incentive credits to be treated as tax payments with regard to an electing PTE.

We want to thank members of the MSCPA Taxation Committee for their valuable time, expertise, and diligence related to these matters. Please understand that despite persistent efforts, we cannot control MDOR’s timeline of information releases.