RI 2026 H8187: Taxation - Business Corporation Tax

Plain-English Summary

This legislation amends the "Business Corporation Tax" regarding pass-through entities (like LLCs, S Corporations, and partnerships). Currently, these businesses can elect to pay state tax at the entity level to help owners manage federal tax deductions. The key change is to the "state tax credit" that owners receive on their personal income taxes for the tax paid by the business. For tax years beginning on or after January 1, 2025, this credit is reduced to 90% of the amount paid by the entity, rather than the full amount. The bill also clarifies that this credit is refundable.

For younger readers

Some business owners pay taxes through their companies instead of paying as individuals. This helps them save money on their federal taxes. Right now, when the company pays this tax to the state, the owner gets a credit (like a coupon) for the full amount to use on their own state tax bill. This new law changes the value of that coupon. Starting in 2025, the credit will only be worth 90% of what the company paid, not the whole thing. This means the state keeps a small part of that money.

Who & Where It Applies

Impacted groups

S Corporation shareholdersLimited Liability Company (LLC) membersPartners in partnershipsSole proprietorsTrust beneficiaries

Impacted communities

All

Constitutional & Fiscal Check

None Likely

Estimated cost

Pass-through entity owners: 10% reduction in tax credit value

Estimated revenue

Amount unknown

Bill Analysis

Both viewpoints

For Progressives

Generates additional state revenue from business owners utilizing tax loopholes, which can be utilized to fund public services and social programs.
Ensures that wealthier individuals who own pass-through entities contribute a slightly larger share to the state tax base by reducing their 100% credit to 90%.
Maintains the overall tax structure that prevents double taxation while capturing a portion of the benefit for the collective good of Rhode Island residents.
May negatively impact small business owners who operate as pass-through entities but are not wealthy, effectively increasing their cost of doing business.
Does not explicitly earmark the retained revenue for specific progressive causes such as education or housing, leaving it available for general spending.
Could be viewed as a complication of the tax code that favors larger entities with accountants over smaller, community-based businesses struggling with compliance.

For Conservatives

Preserves the voluntary nature of the tax election, allowing business owners to decide if the strategy remains financially beneficial despite the reduced credit.
Maintains the mechanism that allows business owners to bypass the federal SALT deduction cap, securing lower federal tax liability.
Clarifies that the tax credit is fully refundable, ensuring that business owners do not forfeit the value of the credit if it exceeds their specific tax liability for the year.
Effectively functions as a tax increase on business owners by reducing the credit for taxes paid from 100% down to 90%.
Increases the financial burden on job creators, potentially discouraging business investment and economic growth within the state.
Adds complexity to the tax code and reduces the efficiency of business capital by retaining 10% of the entity-level tax payment for the state.

Votes

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Full Bill Text

Changes to existing Rhode Island law · 11 additions

SECTION 1. Section 44-11-2.3 of the General Laws in Chapter 44-11 entitled "Business Corporation Tax" is hereby amended to read as follows: 44-11-2.3. Pass-through entities — Election to pay state income tax at the entity level.

(a) Definitions. As used in this section:

(1) “Election” means the annual election to be made by the pass-through entity by filing the prescribed tax form and remitting the appropriate tax.

(2) “Net income” means the net ordinary income, net rental real estate income, other net rental income, guaranteed payments, and other business income less specially allocated depreciation and deductions allowed pursuant to § 179 of the United States Revenue Code (26 U.S.C. § 179), all of which would be reported on federal tax form schedules C and E. Net income for purposes of this section does not include specially allocated investment income or any other types of deductions.

(3) “Owner” means an individual who is a shareholder of an S Corporation; a partner in a general partnership, a limited partnership, or a limited liability partnership; a member of a limited liability company, a beneficiary of a trust; or a sole proprietor.

(4) “Pass-through entity” means a corporation that for the applicable tax year is treated as an S Corporation under I.R.C. 1362(a) (26 U.S.C. § 1362(a)), or a general partnership, limited partnership, limited liability partnership, trust, limited liability company or unincorporated sole proprietorship that for the applicable tax year is not taxed as a corporation for federal tax purposes under the state’s regulations.

(5) “State tax credit” means the amount of tax paid by the pass-through entity at the entity level that is passed through to an owner on a pro rata basis. For tax years beginning on or after January 1, 2025, “state tax credit” means ninety percent (90%) of the amount of tax paid by the pass-through entity at the entity level that is passed through to an owner on a pro rata basis.

(b) Elections.

(1) For tax years beginning on or after January 1, 2019, a pass-through entity may elect to pay the state tax at the entity level at the rate of five and ninety-nine hundredths percent (5.99%).

(2) If a pass-through entity elects to pay an entity tax under this subsection, the entity shall not have to comply with the provisions of § 44-11-2.2 regarding withholding on non-resident owners. In that instance, the entity shall not have to comply with the provisions of § 44-11-2.2 regarding withholding on non-resident owners.

(1) The pass-through entity shall report the pro rata share of the state income taxes paid by the entity which sums will be allowed as a state tax credit for an owner on his or her personal income tax return.

(2) The pass-through entity shall also report the pro rata share of the state income taxes paid by the entity as an income (addition) modification to be reported by an owner on his or her personal income tax returns

(d) State tax credit shall be the amount of tax paid by the pass-through entity, at the entity level, which is passed through to the owners, on a pro rata basis. For tax years beginning on or after January 1, 2025, the state tax credit shall be ninety percent (90%) of the amount of tax paid by the pass-through entity, at the entity level, which is passed through to the owners, on a pro rata basis.

(e) A similar type of tax imposed by another state on the owners’ income paid at the state entity level shall be deemed to be allowed as a credit for taxes paid to another jurisdiction in accordance with the provisions of § 44-30-18.

(f) “Combined reporting” as set forth in § 44-11-4.1 shall not apply to reporting under this section.

(g) For purposes of this section, the member credit shall be refundable, and shall be allowed in full against Rhode Island individual income tax liability for the taxable year in which the entity- level tax was paid. Any portion of the credit that exceeds the member's Rhode Island tax liability shall be refunded to the member.

(h) This section shall sunset and no longer apply to taxable years beginning after December 31 of the year in which the federal limitation on state and local tax deductions under § 164(b)(6) of the Internal Revenue Code is repealed, unless further amended by the general assembly.

(i) The commissioner of revenue may promulgate rules and regulations to implement this section, including rules governing elections, allocations, reporting, and the calculation of the refundable credit.

SECTION 2. This act shall take effect upon passage.