Relating to an entity-level taxation election for pass-through entities and allowing a partner or shareholder to claim a credit against the individual income tax

This bill relates to an entity-level taxation election for pass-through entities and allows a partner or shareholder to claim a credit against the individual income tax.5A imposed against the net income of the taxpayer for the taxable year. Currently, the net income of a partnership or S corporation passes through to the partners or shareholders of the entity and is subject to the individual income tax at the partner or shareholder level. The bill only applies to tax years as long as the limitation on individual deductions applies under section 164(b)(6) of the Internal Revenue Code. If an election is made, the partners or shareholders are allowed a credit against the individual income tax equal to the ratio of the partner’s or shareholder’s share of net income over the total net income multiplied by the state tax liability of the taxpayer. If the amount of credit allowed under the bill exceeds the tax liability of the partner or shareholder for the tax year, the excess may be credited to the tax liability of the partner or shareholder for the following five tax years or until depleted, whichever occurs first. The bill specifies that a taxpayer making an election is liable for the entity-level tax imposed pursuant to the bill. If the electing taxpayer fails to timely pay the full amount of the tax, the bill requires the partners or shareholders to pay the unpaid tax.16 do not apply.85, if applicable.