Insight Tax Updates – the 2021 Idaho Legislature Has Passed Some Significant Tax Bills
By Richard G. Smith,
The 2021 Idaho legislative session ended last week. It may be more accurate to say the legislators went home, since the Senate adjourned and the House “recessed” with the possibility of coming back later in the year if developments warrant. It was the longest legislative session in history, and a very contentious one, but the Legislature and the Governor did accomplish a lot with some important bills that will reduce income tax rates and provide other tax relief in a number of areas. The income tax benefits are the result of budget surpluses created by a very strong Idaho economy.
The changes that will affect most Idahoans are those reducing income tax rates and providing a rebate of taxes paid for the 2019 tax year. Beginning for the 2021 tax year, the top rate for state income tax has been reduced from 6.925% to 6.5%. The taxable income level at which the 6.5% begins is $5,000, reduced from the $7,500 base at which the former top rate began. Other rates at income levels below $5,000 were also reduced. One effect of all this will be to make Idaho more competitive with other states in attracting business to the state. The annual cost to the state budget of this tax reduction is estimated to be about $163 million. In addition, the Legislature provided for one-time refund of 9% of 2019 taxes paid by personal income taxpayers (i.e., not corporations), with a minimum of $50. The total cost of this benefit is about $220 million.
Another significant change that will affect many business owners is a new law that will allow a work-around of the $10,000 limit on itemized deductions for state and local taxes. That limit was enacted as part of the federal Tax Cuts and Jobs Act of 2017, and offset some of the tax benefits of that legislation. The new Idaho law allows pass-through entities (partnerships, LLCs and Sub S corporations) to elect to pay the Idaho income tax that otherwise would have been paid by the owners of the business on the income after it is passed-through to the owner. An IRS ruling in late 2020 allowed this process as a way to bypass the $10,000 limit. Payment by the partnership, LLC or S Corp. will be deductible by the entity for federal tax purposes, thus reducing the income allocated to the owner. The effect is to give a full deduction for the state income taxes attributable to the business. The owner will be able include other taxes in using the $10,000 limit (such as property taxes, or state income taxes on non-business income). Or, if the owner uses the standard deduction, he/she will still have benefit of the deduction of the state income taxes on the business, because the pass-through entity will have paid it and his/her taxable income will be lower by that amount. Regular corporations have always been able to deduct state income taxes, so this new procedure will put all business owners on the same footing.
Other income changes in the 2021 legislative session have some positive and some negative effects. The Legislature conformed Idaho tax law to most of the 2020 changes in the Internal Revenue Code, including the provision that forgiveness of loans made through the Paycheck Protection Program (PPP) will not constitute taxable income as it would have it usual tax principles were applied. However, the Legislature did not conform to the 2020 federal legislation that allowed carrybacks of net operating losses incurred in 2018-2020, and also did not conform to the federal exclusion of income from rental subsidies and unemployment compensation benefits.
Finally, the Legislature devoted a lot of time to property taxes, which have received a lot of attention in recent years due to increased property values and tax assessments. Ultimately, the total amount of property taxes is a function of local government and school district budgets. If those budgets increase, property taxes will increase, and it is just a question of which group of taxpayers pays for the higher costs of government. For many years, there have been limits on budget growth, and legislation this year modified those limits so that now a local government budget can be increased by a maximum of 8% per year, of which 3% is automatically allowed and the remainder can be added (up to 8% total) if there is new construction. Previously, there was no limit on the increase that could be justified by new construction. In addition, in an effort to shift the burden of taxpayers away from lower-income property owners, the legislation increased the exclusion on taxes payable by those owners in the “circuit breaker” program. And to provide a benefit to homeowners, the legislation increased the homeowners’ exemption, which had been the lesser of one-half the assessed value of the property or $100,000. The $100,000 amount was increased to $125,000.
A property tax measure that will benefit businesses is the increase in the exemption for personal property from $100,000 to $250,000 per county. This will result in only larger taxpayers being subject to this controversial tax.
Overall, the 2021 Legislature’s changes in the rates and structure of the income tax will be positive for Idaho businesses, especially for owners of businesses who will be able to take higher deductions for state and local taxes. It remains to be seen whether the property tax changes will provide meaningful relief. An interim committee of the legislature will continue to study that issue.
