HB1668 was introduced by Representative Trey Lamar and SB3102 by Senator Josh Harkins. These are currently active and making their way through the Legislature.

      As has been reported in the September Newsletter and on our CONNECT Forum, members of the Taxation Committee and
the Legislation Committee have been meeting with MDOR and key legislators to address issues with the SALT Cap Workaround
for Pass-Through Entities (PTE) legislation that passed during the 2022 Legislative session. MSCPA is pursuing corrections to Tax
Code Section 27-7-26 in the 2023 session.

     As currently written the statute fails to allow partners, owners and members to receive any benefit from entity level business tax
credits, such as Ad Valorem or Children’s Promise Credits. This will result in double taxation. In addition, any excess of the credit for
tax paid by the pass-through entity cannot currently be refunded or carried forward to the partners, owners and members. We do
not believe this was the intent of the bill and have provided revisions to address this issue. Other cleanup revisions are also included.

Requested changes:

1. Paragraph (1)(b) - Adds language to simplify and clarify the voting rules for the election. The existing law requires a vote by a
governing body of the passthrough entity, however, not all passthrough entities have governing bodies.

2. Paragraph (1)(c) - Strikes the language related to a taxpayer not being liable for taxes under the chapter for its distributive share
of the income of the electing pass-through entity. We believe that this language could lead some to believe that a taxpayer is both,
exempt from the tax, and allowed a credit at the same time, resulting in “double dipping”.

3. Paragraph (1)(c) - Clarifies that the PTE credit is based on the amount of taxes actually paid by the PTE, and that any other
credits generated by the PTE pass through on a pro rata basis is to be claimed on the owners’ returns along with the PTE
credit. This method should ensure that owners are able to receive the benefit of the entity-level business credit (such as Ad
Valorem or Children’s Promise Credits). The example below illustrates the issue.
      1. Assume the PTE has $1,000,000 of taxable income, so its initial entity-        level income tax liability would be
$50,000 (assuming flat 5% rate for model purposes). If it generated a $50,000 ad valorem tax credit, its net
entity-level tax liability would be $0 if the ad valorem credit was claimed at the PTE level.
      2. Let’s assume it has two equal corporate owners. Each gets an equal allocation of $500,000 of taxable income
but will not receive any credit for tax paid at the PTE level. When they compute their separate owner-level tax
liabilities, they have $500,000 of income x 5% rate (taking corporate rate) to give a tax liability of $25,000. But
their share of the PTE credit for tax paid at the PTE level is $0 so they have a net $25,000 shortfall and effectively
lose the benefit of the ad valorem tax credit.
      3. Our solution is to allow the PTE credit to be calculated at the partner level based on the amount of tax actually
paid at the partnership level, and then the ad valorem tax credit to pass through the PTE and be claimed at the
owner level.

4. Paragraph (1)(c) – A sentence was added at the end of the paragraph allowing for the carryover or refund of any excess
credits at the partner level. We believe this, along with the change detailed above in item 3, resolves the discrepancy between
individual and corporate tax rates without impacting overall revenues to the State. This also clarifies that any carryforward
limitations on credits generated by the PTE apply at the owner level, similar to the pass-through of those credits under
current law.

MSCPA will update the membership as legislation progresses.