Bill Summary – FastDemocracy

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68th Legislature 2023                                                                                             SB 554.1
                                                SENATE BILL NO. 554
                                             INTRODUCED BY G. HERTZ
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  A BILL FOR AN ACT ENTITLED: “AN ACT PROVIDING FOR AN OPTIONAL PASS-THROUGH ENTITY TAX;
  PROVIDING THE ENTITY TAX IS IN LIEU OF THE COMPOSITE TAX; ESTABLISHING PROCEDURES TO
  MAKE THE OPTIONAL ELECTION; PROVIDING THAT A DISTRIBUTIVE SHARE OF THE ENTITY TAX PAID
  IS CLAIMED AS A REFUNDABLE CREDIT; PROVIDING DEFINITIONS; PROVIDING RULEMAKING
  AUTHORITY; AMENDING SECTIONS 15-30-2110 AND 15-30-2120, MCA; AND PROVIDING EFFECTIVE
  DATES AND A RETROACTIVE APPLICABILITY DATE.”
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  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA:
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          NEW SECTION. Section 1.         Definitions. As used in [sections 2 through 4] and this section, unless
  the context clearly indicates otherwise, the following definitions apply:
          (1)      "Electing pass-through entity" means a partnership or an S. corporation that elects to be
  subject to an entity tax.
          (2)      "Entity tax" means a tax that an electing pass-through entity elects to pay under [sections 1
  through 4].
          (3)      "Nonresident owner" means an individual, estate, or trust that is not a resident owner.
          (4)      "Owner" means a shareholder of an S. corporation or a partner in a partnership.
          (5)      "Resident owner" means an individual, estate, or trust owner that is a resident of the state.
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          NEW SECTION. Section 2.         Pass-through entity tax. (1) Each electing pass-through entity shall, on
  or before the due date of the pass-through entity's tax return, pay an entity tax. The entity tax is equal to the
  highest marginal tax rate in effect under 15-30-2103 for the tax year the election is made multiplied by the
  distributive share of Montana source income calculated under 15-30-3302 for all owners taxed under this
  chapter. Electing entities may substitute the distributive share of Montana source income allocated to owners
  who are residents as defined in 15-30-2101 for the distributive share of Montana source income calculated
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68th Legislature 2023                                                                                             SB 554.1
  under 15-30-3302 for all resident owners taxed under this chapter for the computation of the tax.
           (2)     An electing pass-through entity shall allocate the entity tax to its owners based on their
  distributive share of Montana source income used to calculate the entity tax in subsection (1).
           (3)     The entity tax is in lieu of the tax paid under 15-30-3312 and 15-30-3313. If the owner of an
  electing pass-through entity is a partnership or S. corporation that does not elect to pay the entity tax, any
  amount of Montana source income in addition to the income subject to the entity tax is subject to the tax paid
  under 15-30-3313. When the provisions under 15-30-3313 apply, the withholding threshold under 15-30-
  3313(1) must be determined without regard to the entity tax.
           (4)     The electing entity shall make quarterly estimated tax payments and be subject to the
  underpayment interest as prescribed by 15-30-2512(5)(a) computed on the entity tax liability included on the
  pass-through entity return.
           (5)     The entity tax under this section is subject to penalties and interest under 15-1-216.
           (6)     A nonresident owner is not required to file an income tax return under the provisions of 15-30-
  2602 for a tax year if, for the tax year, all of the nonresident owner's Montana source income is subject to the
  entity tax.
           (7)     The department may adopt rules and prescribe forms necessary to administer and enforce the
  provisions of [sections 1 through 4].
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           NEW SECTION. Section 3.        Making pass-through entity tax election. (1) The election must be
  made annually no later than the due date, including extensions, of the pass-through entity's tax return as
  prescribed by 15-30-3302. The election for a tax year is irrevocable for the year it is made.
           (2)     The pass-through entity must designate a Montana pass-through entity representative who is
  authorized to make the election to subject the pass-through entity to the tax provided for in [sections 1 through
  4].
           (a)     The Montana pass-through entity representative acts on behalf of the pass-through entity for
  the applicable tax year.
           (b)     With respect to an action required or permitted to be taken by a pass-through entity under
  [sections 1 through 4] and a proceeding under 15-1-211 with respect to the action, the Montana pass-through
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68th Legislature 2023                                                                                                  SB 554.1
  entity representative for the tax year has the sole authority to act on behalf of the pass-through entity, and the
  pass-through entity's direct owners and indirect owners are bound by those actions.
          (c)       The department may establish reasonable qualifications and procedures for designating a
  person to be the Montana pass-through entity representative.
          (3)       Nothing in this section prevents a pass-through entity that does not have business activity in
  the state during the tax year but that does have resident owners from electing to pay the entity tax.
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          NEW SECTION. Section 4.           Pass-through entity tax -- refundable credit -- credit for taxes paid to
  another state. (1) An owner that is not a pass-through entity may claim the distributive share of the owner's
  entity tax paid by an electing pass-through entity as a refundable credit against the taxes under this chapter.
          (2)       An owner that is an electing pass-through entity shall claim its distributive share of entity tax
  paid by another pass-through entity as a refundable credit against the taxes under 15-30-3312, 15-30-3313, or
  [section 2(1)].
          (3)       An owner that is not an electing pass-through entity must allocate its distributive share of entity
  tax paid by another pass-through entity and any amount of estimated tax paid to owners subject to tax under
  this chapter based on the owner's share of profit and loss. The owner that is not an electing pass-through entity
  may claim the remainder as an overpayment or refund.
          (4)       [Sections 1 through 4] do not prevent a resident owner from claiming a credit for taxes paid to
  another state as provided in 15-30-2302.
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          Section 5. Section 15-30-2110, MCA, is amended to read:
          "15-30-2110.     (Temporary) Adjusted gross income. (1) Subject to subsection (15), adjusted gross
  income is the taxpayer's federal adjusted gross income as defined in section 62 of the Internal Revenue Code,
  26 U.S.C. 62, and in addition includes the following:
          (a)       (i) interest received on obligations of another state or territory or county, municipality, district, or
  other political subdivision of another state, except to the extent that the interest is exempt from taxation by
  Montana under federal law;
          (ii)      exempt-interest dividends as defined in section 852(b)(5) of the Internal Revenue Code, 26
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68th Legislature 2023                                                                                                 SB 554.1
  U.S.C. 852(b)(5), that are attributable to the interest referred to in subsection (1)(a)(i);
            (b)    refunds received of federal income tax, to the extent that the deduction of the tax resulted in a
  reduction of Montana income tax liability as determined under subsection (16);
            (c)    that portion of a shareholder's income under subchapter S. of Chapter 1 of the Internal
  Revenue Code that has been reduced by any federal taxes paid by the subchapter S. corporation on the
  income;
            (d)    depreciation or amortization taken on a title plant as defined in 33-25-105;
            (e)    the recovery during the tax year of an amount deducted in any prior tax year to the extent that
  the amount recovered reduced the taxpayer's Montana income tax in the year deducted;
            (f)    if the state taxable distribution of an estate or trust is greater than the federal taxable
  distribution of the same estate or trust, the difference between the state taxable distribution and the federal
  taxable distribution of the same estate or trust for the same tax period; and
            (g)    except for exempt-interest dividends described in subsection (2)(a)(ii), the amount of any
  dividend to the extent that the dividend is not included in federal adjusted gross income; and
            (h)    for a pass-through entity, estate, or trust, the amount of state income taxes deducted pursuant
  to section 164(a)(3) of the Internal Revenue Code, 26 U.S.C. 164(a)(3).
            (2)    Notwithstanding the provisions of the Internal Revenue Code, adjusted gross income does not
  include the following, which are exempt from taxation under this chapter:
            (a)    (i) all interest income from obligations of the United States government, the state of Montana,
  or a county, municipality, district, or other political subdivision of the state and any other interest income that is
  exempt from taxation by Montana under federal law;
            (ii)   exempt-interest dividends as defined in section 852(b)(5) of the Internal Revenue Code, 26
  U.S.C. 852(b)(5), that are attributable to the interest referred to in subsection (2)(a)(i);
            (b)    interest income earned by a taxpayer who is 65 years of age or older in a tax year up to and
  including $800 for a taxpayer filing a separate return and $1,600 for each joint return;
            (c)    (i) except as provided in subsection (2)(c)(ii) and subject to subsection (17), the first $4,070 of
  all pension and annuity income received as defined in 15-30-2101;
            (ii)   subject to subsection (17), for pension and annuity income described under subsection (2)(c)(i),
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68th Legislature 2023                                                                                             SB 554.1
  as follows:
          (A)      each taxpayer filing singly, head of household, or married filing separately shall reduce the total
  amount of the exclusion provided in subsection (2)(c)(i) by $2 for every $1 of federal adjusted gross income in
  excess of $33,910 as shown on the taxpayer's return;
          (B)      in the case of married taxpayers filing jointly, if both taxpayers are receiving pension or annuity
  income or if only one taxpayer is receiving pension or annuity income, the exclusion claimed as provided in
  subsection (2)(c)(i) must be reduced by $2 for every $1 of federal adjusted gross income in excess of $33,910
  as shown on their joint return;
          (d)      all Montana income tax refunds or tax refund credits;
          (e)      gain required to be recognized by a liquidating corporation under 15-31-113(1)(a)(ii);
          (f)      all tips or gratuities that are covered by section 3402(k) or service charges that are covered by
  section 3401 of the Internal Revenue Code of 1954, 26 U.S.C. 3402(k) or 3401, as amended and applicable on
  January 1, 1983, received by a person for services rendered to patrons of premises licensed to provide food,
  beverage, or lodging;
          (g)      all benefits received under the workers' compensation laws;
          (h)      all health insurance premiums paid by an employer for an employee if attributed as income to
  the employee under federal law;
          (i)      all money received because of a settlement agreement or judgment in a lawsuit brought
  against a manufacturer or distributor of "agent orange" for damages resulting from exposure to "agent orange";
          (j)      principal and income in a medical care savings account established in accordance with 15-61-
  201 or withdrawn from an account for eligible medical expenses, as defined in 15-61-102, including a medical
  care savings account inherited by an immediate family member as provided in 15-61-202(6);
          (k)      principal and income in a first-time home buyer savings account established in accordance with
  15-63-201 or withdrawn from an account for eligible costs, as provided in 15-63-202(7), for the first-time
  purchase of a single-family residence;
          (l)      contributions or earnings withdrawn from an account established under the Montana family
  education savings program, Title 15, chapter 62, or from a qualified tuition program established and maintained
  by another state as provided by section 529(b)(1)(A)(ii) of the Internal Revenue Code, 26 U.S.C.
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68th Legislature 2023                                                                                                 SB 554.1
  529(b)(1)(A)(ii), for qualified education expenses, as defined in 15-62-103, of a designated beneficiary;
          (m)      the recovery during the tax year of any amount deducted in any prior tax year to the extent that
  the recovered amount did not reduce the taxpayer's Montana income tax in the year deducted;
          (n)      if the federal taxable distribution of an estate or trust is greater than the state taxable
  distribution of the same estate or trust, the difference between the federal taxable distribution and the state
  taxable distribution of the same estate or trust for the same tax period;
          (o)      deposits, not exceeding the amount set forth in 15-30-3003, deposited in a Montana farm and
  ranch risk management account, as provided in 15-30-3001 through 15-30-3005, in any tax year for which a
  deduction is not provided for federal income tax purposes;
          (p)      income of a dependent child that is included in the taxpayer's federal adjusted gross income
  pursuant to the Internal Revenue Code. The child is required to file a Montana personal income tax return if the
  child and taxpayer meet the filing requirements in 15-30-2602.
          (q)      principal and income deposited in a health care expense trust account, as defined in 2-18-
  1303, or withdrawn from the account for payment of qualified health care expenses as defined in 2-18-1303;
          (r)      the amount of the gain recognized from the sale or exchange of a mobile home park as
  provided in 15-31-163;
          (s)      the amount of a scholarship to an eligible student by a student scholarship organization
  pursuant to 15-30-3104; and
          (t)      a payment received by a private landowner for providing public access to public land pursuant
  to Title 76, chapter 17, part 1.
          (3)      A shareholder of a DISC that is exempt from the corporate income tax under 15-31-102(1)(l)
  shall include in the shareholder's adjusted gross income the earnings and profits of the DISC in the same
  manner as provided by section 995 of the Internal Revenue Code, 26 U.S.C. 995, for all periods for which the
  DISC election is effective.
          (4)      (a) A taxpayer who, in determining federal adjusted gross income, has reduced the taxpayer's
  business deductions:
          (i)      by an amount for wages and salaries for which a federal tax credit was elected under sections
  38 and 51(a) of the Internal Revenue Code, 26 U.S.C. 38 and 51(a), is allowed to deduct the amount of the
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68th Legislature 2023                                                                                              SB 554.1
  wages and salaries paid regardless of the credit taken; or
          (ii)     for which a federal tax credit was elected under the Internal Revenue Code is allowed to
  deduct the amount of the business expense paid when there is no corresponding state income tax credit or
  deduction, regardless of the credit taken.
          (b)      The deductions in subsection (4)(a) must be made in the year that the wages, salaries, or
  business expenses were used to compute the credit. In the case of a partnership or small business corporation,
  the deductions in subsection (4)(a) must be made to determine the amount of income or loss of the partnership
  or small business corporation.
          (5)      Married taxpayers filing a joint federal return who are required to include part of their social
  security benefits or part of their tier 1 railroad retirement benefits in federal adjusted gross income may split the
  federal base used in calculation of federal taxable social security benefits or federal taxable tier 1 railroad
  retirement benefits when they file separate Montana income tax returns. The federal base must be split equally
  on the Montana return.
          (6)      Married taxpayers filing a joint federal return who are allowed a capital loss deduction under
  section 1211 of the Internal Revenue Code, 26 U.S.C. 1211, and who file separate Montana i