BlumShapiro Tax Update: Tax Changes in 2015 Rhode Island Budget Bill Will Impact Businesses and Individuals

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Last month, Rhode Island Governor Lincoln Chafee signed the state’s fiscal year 2015 budget bill. The bill enacts widespread changes to the Rhode Island tax system across a number of tax areas.

Last month, Rhode Island Governor Lincoln Chafee signed the state’s fiscal year 2015 budget bill. The bill enacts widespread changes to the Rhode Island tax system across a number of tax areas. The most significant changes will be to the corporate income tax, but changes were also made that impact both personal income tax and the estate tax.

Business Tax Changes

Corporate Tax Rate
Effective for tax years beginning on or after January 1, 2015, the corporate tax rate will be reduced to 7% from 9% of net income. As part of this legislative change for corporations, Rhode Island eliminated the requirement to add back related party interest in determining net income. In addition, each company that is part of a unitary business will be required to file a combined return. An affiliated group of C corporations may elect to be treated as a combined group with respect to the combined reporting requirement. The new law involving combined reporting requires a "water's edge" treatment. It also mandates the "Finnigan" method for computing the sales factor and includes some tax haven language. Special safe harbor rules apply to calculating estimated tax payments for those taxpayers affected by the combined reporting requirement.

Corporations operating in multiple states will apply a single sales factor apportionment in lieu of the standard three-factor apportionment formula. The single sales apportionment applies only to C corporations and applies regardless whether they file as part of a combined/unitary group. All other business entities will continue using the standard three-factor apportionment. Rhode Island will also change to market-based sourcing for sales of services, meaning the sale will need to be sourced to the state in which the recipient of the service receives benefit from the service rather than the state in which the work is being performed. This change also applies only to C corporations. An independent appeals process must be established by the Division of Taxation to attempt to resolve any disputes between the Administrator and the taxpayer with respect to the method of allocation applied.

Excise Tax
The increase of excise tax on several categories of alcoholic beverages and the sales and use tax exemption on wine and spirits sold by Class A licensees of alcoholic beverages that were scheduled to expire on March 31, 2015 were extended through June 30, 2015.

Franchise Tax
Applicable to tax years beginning January 1, 2015, the franchise tax calculated on a corporation's authorized capital stock is repealed. S corporations will be subject to a minimum tax of $500 effective for tax years beginning on or after January 1, 2015.
Individual and Estate Tax Changes

Personal Income Tax Returns
The new legislation created a "safe harbor" for reporting the amount of use tax due on the Form 1040. The taxpayer may use a lookup table established by the Tax Administrator. The table will be based on federal adjusted gross income before modifications or adjustments and apply to the aggregate of single purchases of less than $1,000. For single purchase of $1,000 or more, the actual amount must be listed for that purchase in addition to the look-up table value. When completing and filing a personal income tax return, the taxpayer must check a box attesting to the amount of use tax listed on the return.

Rhode Island state tax delinquents will now be prohibited from registering a motor vehicle or transferring motor vehicle registrations. On or before October 31 of each year and at least quarterly thereafter, the Tax Administrator must furnish the Division of Motor Vehicles with a list of the names, addresses and social security numbers of persons who have neglected or refused to file a tax return and/or to pay any tax administered by the Tax Administrator. These would be taxes for which no administrative or appellate review is pending regarding such tax matter. The Tax Administrator will also provide a list to the Division of Motor Vehicles of those whose names appear on the list but who have subsequently filed all returns and paid all required taxes, interest and penalties or who have entered into a bona fide agreement to pay what is due. The Tax Administrator must provide the Division of Motor Vehicles with a certificate of good standing within five business days of the taxpayer's request. Within five days of receiving such certificate, the Division of Motor Vehicles must register or transfer the person's registration.

Earned Income Tax Credit
Rhode Island is changing its earned income tax credit effective for tax years beginning on or after January 1, 2015. The credit will be 10% of the federal credit instead of 25%, and any excess credit over the tax due will be 100% refundable. Under the old laws, only 15% of the excess was refundable.

Real Estate Conveyance Tax
The real estate conveyance tax is increased to $2.30 per $500 from $2.00 per $500 paid for the purchase of real estate. The increase will help pay for the lead hazard abatement program as well as other housing programs.

Estate Tax
For decedents dying on or after January 1, 2015, the Rhode Island estate tax threshold will be $1.5 million up from $921,655 for decedents dying in 2014. This means that, in general, a net taxable estate valued at $1.5 million or less will not be subject to Rhode Island's estate tax. The threshold will be indexed for inflation.

Michelle A. Berkovitz, CPA, MST, is a manager with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with nearly 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation, and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

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