Projo Biz Blog

And that proposal would affect the majority of companies that do business in Rhode Island. Here's why:

Out of about 50,600 companies that do business in Rhode Island (not counting sole proprietorships), only about 3,500 pay the state's 9-percent corporate income tax, according to the tax-reform panel's figures, based on the 2006 tax year.

The vast majority of companies -- about 47,000 -- do not. That is because most of them are organized as pass-through entities.

As such, their income is typically not taxed at the entity level. Instead, their income passes through, or flows through, to the businesses' owners.

The owners report that income, and pay tax on it, on their individual state income-tax returns, at rates as high as 9.9 percent, said Gregory A. Porcaro, a former president of the Rhode Island Society of Certified Public Accountants.

Although the businesses themselves are not subject to the state's corporate income tax, they nevertheless must pay a minimum annual tax (sometimes referred to, in shorthand, as a minimum tax, or minimum franchise tax).

That tax was last changed in 2004, when it was doubled, to the existing $500.

Reducing it now, to $450, "is not going to change the world," but could help many struggling businesses, especially small businesses, said Porcaro, tax partner at Otrando Porcaro & Associates Ltd., a CPA firm in Warwick.

For example, it would benefit the thousands of businesses that are organized as limited liability companies (LLCs) and subchapter S corporations (S corporations), Porcaro said.
It also would benefit companies that are organized as subchapter C corporations (traditional C corporations) that would normally be subject to the state's corporate income tax -- but do not wind up paying that tax in a given year because of losses.

If the proposed reduction in the minimum tax were adopted, it would reduce the overall amount that those businesses pay, in the aggregate, by about $2.3 million, to about $21.18 million, according to estimates by state Tax Administrator David M. Sullivan.

Owners of pass-through entities would also see potential tax savings on their individual returns, said Patricia A. Thompson, a member of the tax-reform panel.

That is partly because the panel has proposed to reduce the state's top individual income-tax rate, to 5.5 percent from the current 9 percent, said Thompson, tax partner at Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.

The proposal would also reduce the number of individual income-tax brackets and widen the brackets, so that more of a taxpayer's income would be taxed at lower rates, said Paul L. Dion, chief of the state Department of Revenue's Office of Revenue Analysis.

Another little-noticed provision in the panel's proposal would, in effect, substitute a graduated franchise tax for the existing corporate income tax.

As a result, traditional C corporations that are now subject to the state's corporate income tax would not escape tax altogether.

Instead, traditional C corporations would pay a minimum franchise tax of $450 on Rhode Island taxable income of less than $10,000, for example, and a proposed franchise tax of $10,000 on Rhode Island taxable income of $2.5 million or greater, Sullivan said.
Nevertheless, traditional C corporations doing business in Rhode Island would still see a net savings.

If the corporate income tax were retained in its present form, those businesses would wind up paying about $84 million in tax overall.

Under the proposal, they would end up paying about $5 million overall through the graduated franchise tax.

The net result would be overall savings to those businesses of about $79 million.
Both of the proposed changes -- the reduction in the minimum tax, and the substitution of a graduated franchise tax for the state's corporate income tax -- would yield overall tax savings to businesses of about $82 million, according to the tax-reform panel's estimates.

Carcieri formed the panel last year, urging it to come up with proposals that would make the state's tax system more competitive, especially when compared with that of Rhode Island's two neighboring states, Massachusetts and Connecticut.

Rhode Island's corporate income tax rate is second highest in New England, and will become the highest next year if left unchanged, the panel found. (Connecticut's rate is 7.5 percent; the Massachusetts rate is 9.5 percent, but is to fall to 8.75 percent next year.)

Ocean State Action, a coalition of 14 community and other organizations, opposes the tax-reform panel's business proposals. In a statement, the group said, "At a time when taxes have already been shifted too far away from large corporations and onto middle-class families, and when Rhode Island faces a serious budget deficit, this proposal is both deeply unfair and totally irresponsible."

The group also said that, under the proposal, 50 corporations with the highest taxable income "would see a windfall of nearly $40 million in tax cuts . . . . Meanwhile, more than 90 percent of corporations would receive a symbolic tax cut of $50."

The tax-reform panel is preparing its final report, said Gary S. Sasse, the chairman who is also director of the state Department of Revenue.

The report is expected to be completed and forwarded to Carcieri within the next week or so for his review.

Carcieri is scheduled to make the annual "state of the state" address tomorrow night. Later this month, he is scheduled to propose a budget for the year that begins July 1. The General Assembly is in the process of considering his proposed budget changes for the year that will end June 30.

The presentations made at the start of the panel's Feb. 4 meeting are available online, including the presentation on business taxation, individual taxation, and property taxation.