On September 9, 2022, the Arkansas Department of Finance and Administration (DFA) posted proposed regulations for administration of the state’s pass-through entity tax (PTET) on its website. If adopted, the proposed regulations will be effective for tax years beginning on or after January 1, 2022.
As expected, much of the language in the proposed regulations mirrors that of the enacting legislation (Act 362). However, the proposed regulations do provide clarification on administration and filing protocols the legislature left to the DFA. Proposed changes include:
- Substantially Similar Tax – The DFA will publish a listing of states that have enacted a substantially similar tax prior to February 1 of each year. Note that this list is not all-inclusive, and the omission of a tax from the list is not conclusive to the determination of whether the tax is a substantially similar tax for purposes of the PTET. A subtraction from Arkansas gross income is available to members if a substantially similar tax was paid in another state on that gross income.
- The PTET election will be made on forms provided by the secretary of the DFA (secretary), and the election must contain the entity’s federal employer identification number. A copy of the election must be provided by the entity to each member making the election.
- The annual PTET election is revocable prior to the extended due date of the tax return for the tax year of election. If revoked, installment payments made pursuant to the election will be transferred or refunded as directed by the entity. Options for disposition of the PTET installment payments include refunding to the entity, transferring to the entity’s withholding or composite tax account, or a carryforward of the payments in the PTET account toward a subsequent year. If the entity provides no direction as to a refund of transfer of the installment payments, the DFA will refund these amounts to the entity.
- Withholding is not required for nonresident members in tax years when a business entity makes a valid PTET election.
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