Corporate Close-Up: Is Rhode Island Tax Overhaul a Mixed Blessing for Corporations?


 

On June 19, Rhode Island’s Governor signed the state’s 2015 fiscal year budget bill . The bill calls for a complete reform of how C-corporations are taxed in Rhode Island, effective for tax years beginning on or after Jan. 1, 2015. Corporations are likely to cheer a lower tax rate and repeal of the state’s franchise tax. But they might be less sanguine about the state’s adoption of combined reporting.

The bill reduces Rhode Island’s corporate income tax from 9% for previous years to 7%, with the annual corporate minimum tax rate remaining at $500. Rhode Island also repealed its corporate franchise tax, which under current law, in effect for tax year 2014, is $2.50 for each $10,000 or fraction thereof of the corporation’s authorized capital stock.

Although this seems like a complete win for corporations in Rhode Island, there is a catch. Rhode Island also adopted combined reporting for corporate income tax purposes. This means a business, which is organized as a C-corporation, and is part of a combined group engaged in a single business enterprise will have to file a combined report. These corporations will not only have to report their own income, but also the combined income of the other corporations, or affiliates, that are under common ownership and part of a unitary business. In limited circumstances, Rhode Island will allow election to be treated as a combined group in lieu of a unitary business group.

To relieve some of the added burden placed on C-corporations, Rhode Island also changed its apportionment formula. Starting in 2015, all entities that are organized as C-corporations must use a single sales factor apportionment formula. This, however, does not change how other business entities, such as subchapter S-corporations, partnerships, and limited liability companies that are taxed as pass-through entities, apportion their income. They will still follow the equal-weighted three-factor apportionment formula.  

The enacted bill also changes Rhode Island’s sourcing method for a corporation’s sale of services. Under current law, when a corporation calculates the sales factor for apportionment purposes, it uses the cost-of-performance method. In 2015, the sales factor will be sourced using market-based sourcing for business entities that are organized as C-corporations. The market-based sourcing will source receipts from transactions (other than sales of tangible personal property) to the market state – the state where the recipient of the service receives benefit from the service.

These changes will prove to be significant for Rhode Island C-corporation taxpayers. The new tax scheme is estimated to increase business corporation tax revenues in Rhode Island by $2.7 million in 2015.

 

By Erica Parra

 

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn  page: Will Rhode Island corporations’ effective tax rate increase or decrease with the new tax scheme?

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