Missouri Enacts PTE Tax Election and Reintroduces R&D Tax Credit

Governor Mike Parson on June 30, 2022, signed into law a bill (H.B. 2400) that, among other things: (1) establishes an elective pass-through entity (PTE) tax regime in Missouri (referred to as the “SALT Parity Act”) and (2) reintroduces a state research and development (R&D) tax credit.

 

PTE tax election

Effective for tax years ending on or after December 31, 2022, an “affected business entity” can make an annual election to be taxed at the entity level.  Missouri defines “affected business entity” to mean any partnership or S corporation – including LLCs that are taxed as partnerships or S corporations for federal income tax purposes – that elects to be taxed at the pass-through entity level.

The PTE tax base is equal to the sum of each owner’s income, gain, deduction and loss items to the extent derived from or connected with sources within Missouri, as further modified by Missouri’s existing income tax provisions related to PTEs.  An affected business entity is also allowed a deduction calculated under Internal Revenue Code (IRC) Section 199A.  The elective PTE tax rate is set as the highest rate of tax used to determine a Missouri income tax liability for an individual.  If a PTE’s tax base is a net loss, the net loss can be carried forward to succeeding tax years for which the affected business entity elects to be subject to the PTE tax.

For each tax year of an election, an affected business entity must report to each of its owners the owner’s direct pro rata share of the PTE tax.  Each owner of an electing PTE that is subject to the PTE tax is entitled to a credit against their Missouri income tax equal to the owner’s direct and indirect pro rata share of the PTE tax paid.  If the amount of credit exceeds the owner’s Missouri tax liability for that tax year, any excess amount will not be refunded, but instead will be carried forward to each succeeding tax year until the credit is fully taken.

In addition, full-year and part-year residents will receive a tax credit to offset their Missouri personal income tax for the resident’s or part-year resident’s direct and indirect pro rata share of taxes paid by an electing PTE to another state or the District of Columbia, if the Director of Revenue determines the tax is substantially similar to Missouri’s elective PTE tax.  If the amount of credit exceeds the resident/part-year resident owner’s Missouri tax liability for that year, the excess amount cannot be refunded nor carried forward.
 
The legislation does not include any special rules for waiving penalties on any underpayments attributable to making the Missouri PTE tax election with respect to tax year 2022.

 

R&D tax credit

Effective for tax years beginning on or after January 1, 2023, Missouri’s Director of Economic Development may authorize a taxpayer to receive a tax credit against tax in an amount equal to or greater of: (1) 15% of the taxpayer’s “additional qualified research expenses” or (2) 20% of the taxpayer’s “additional qualified research expenses” if such qualified research expenses relate to research conducted in conjunction with a public or private college or university located in the state.
 
Missouri defines “additional qualified research expenses” as the difference between (1) qualified research expenses, as certified by the director of economic development, incurred in a tax year and (2) the average of the taxpayer’s qualified research expenses incurred in the three immediately preceding tax years.  “Qualified research expenses” have the same meaning as provided in IRC Section 41.
 
Missouri’s R&D tax credit has the following limitations:

• Tax credit cannot exceed 200% of the taxpayer’s average qualified research expenses incurred during the three immediately preceding tax years.

• No single taxpayer can receive more than $300,000 in tax credits per tax year.

• The aggregate of all R&D tax credits authorized by Missouri’s Director of Economic Development is capped at $10 million, annually.

  • Of the annual $10 million, $5 million shall be reserved for minority business enterprises, women’s business enterprises and small businesses.

  • If the total eligible claims for credits received in a year exceed the annual cap, each eligible claimant shall be issued credits on a pro rata basis, after all new businesses (less than five years old) are issued full tax credits first.

 Taxpayers can carry forward the excess credit amounts for the next 12 succeeding years or transfer, sell or assign up to 100% of the credit amounts to other taxpayers.  For a taxpayer with a flow-through tax treatment to its members, the tax credit will be allowed to members in proportion to their share of ownership on the last day of the taxpayer’s tax period.
 
In addition, purchases of Missouri qualified research and development equipment are exempt from all state and local sales and use taxes.  “Qualified research and development equipment” is defined as tangible personal property that has not previously been used in Missouri for any purpose and is acquired by the purchaser for the purpose of research and development activities devoted to experimental or laboratory research and development for new products, new uses of existing products, or improving or testing existing products.
 
This program will automatically sunset December 31, 2028.  If the program is reauthorized, the reauthorized program will automatically sunset December 31 of the 12th year after the effective date the program is reauthorized.

 

 

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