In this issue, we address important new Missouri tax changes that were passed on May 6, 2014 after the Missouri Legislature overruled Governor Jay Nixon's veto. The legislation modifies the individual income tax rate table by reducing the top tax rate by one-half of a percent over a period of years, beginning in 2017. Each reduction to the rate will be by one-tenth of a percent. Once fully phased in, the top rate of tax on individual income will be five and one-half percent. This legislation also requires the tax brackets for individual income tax to be adjusted annually for inflation.
Additionally, the legislation creates an individual income tax deduction for flow-through business income from sole proprietorships, S corporations and partnerships that is reported on Schedule C or E of a Taxpayer's federal income tax return and sourced to Missouri. While not as broad-based and sweeping of a tax cut, many commentators believe that the creation of this Missouri business income tax deduction is in direct response to the Kansas tax cuts that were passed beginning in 2013 (see the description of the Kansas tax cuts here). The Missouri income tax deduction will be phased in over a period of years beginning in 2017. Each increase to the deduction amount will be five percent. Once fully phased-in, taxpayers will be allowed to deduct twenty-five percent of such Missouri source flow-through business income.
Note that neither the income tax rate reduction nor the business income tax deduction will be phased into effect unless the State of Missouri's net general revenue collected in the previous fiscal year exceeds the amount of net general revenue in any one of the three fiscal years prior to such year by at least $150 million.
Assuming that the net general revenue requirements are met, below is a listing of the tax rate decreases and deduction percentage for small business income for each of the respective tax years:
Click here to view table.
What This Means For Missouri Taxpayers
Owners of sole proprietorships, S corporations and partnerships with Missouri source income will owe less Missouri tax beginning as early as 2017, provided that the statutory net general revenue requirements are met.
Additionally, C corporations with Missouri source income might consider reorganizing into a Subchapter S corporation or a partnership to take advantage of the new deduction for Missouri source business income. It is also possible that some taxpayers might restructure their business operations to derive a greater percentage of their income from Missouri sources to take further advantage of the new Missouri tax laws.