Summary of corporate tax changes

Tax Rate: The corporate income tax rate under Rhode Island General Laws (RIGL) § 44-11-2 will be 7 percent for tax years beginning on or after January 1, 2015, down from the 9 percent for 2014.

Franchise Tax: For 2014, the franchise tax is generally $2.50 per $10,000 of a corporation’s authorized capital stock. However, for tax years beginning on or after January 1, 2015, the franchise tax is repealed.

Combined Reporting: For tax year 2014, corporations subject to Rhode Island’s corporate income tax file separate returns, as separate entities. However, for tax years beginning on or after January 1, 2015, Rhode Island has adopted combined reporting for corporate income tax purposes. As a result, a business which is treated as a C corporation – and which is part of a combined group engaged in a single business enterprise (a “unitary” business) – must file a combined report with Rhode Island. Thus, a corporation will generally have to treat all of its affiliates as if they were a single company, and combine all of their taxable income in a single pool. A formula will be used to apportion combined income to Rhode Island for tax purposes.

Estimated Tax: For tax years beginning on or after January 1, 2015, Rhode Island will apply special rules regarding payments of estimated tax for any taxpayer required to file a combined report. To meet “safe harbor” provisions, such taxpayers will have to compute estimated payments for that tax year as follows:

▪ The installments must equal 100 percent of the tax due for the prior year plus any additional tax that is due to the combined reporting provisions; or

▪ The installments must equal 100 percent of the current year tax liability.

Apportionment: For tax years beginning on or after January 1, 2015, business that are treated as C corporations and that are or will be taxed under Rhode Island General Laws Chapter 44-11 will use a single factor – sales (total receipts) – for apportionment purposes, instead of the three-factor apportionment formula, which includes sales, payroll, and property.(Entities treated as pass-through entities for federal tax purposes will continue to use three factor apportionment.)

Sourcing: For tax years beginning on or after January 1, 2015, businesses that are treated as C corporations and that are, or will be, taxed under RIGL Chapter 44-11 will use a different method regarding how to treat the sale of services for purposes of corporate income tax apportionment. For 2014, when a corporation calculates the sales factor for apportionment purposes, it assigns the sale of its services to the state in which the income-producing activity was actually performed – known as the cost-of-performance method. If the corporation performs activity in multiple states, the corporation assigns the sale to the state in which the corporation performed a greater proportion of the activity than in any other state – based on the cost of performance. However, for tax years beginning on or after January 1, 2015, Rhode Island will use a market-based sourcing approach, which says that receipts from transactions (other than sales of tangible personal property) are sourced to the market state – that is, the state where the recipient of the service receives benefit from the service.

Subchapter S: For tax years beginning on or after January 1, 2015, the franchise tax is repealed. As a consequence, subchapter S corporations will be subject to the annual minimum tax under the corporate income tax statute instead of under the franchise tax statute. (As a practical matter, most S corps will see no change: They will continue to pay the annual minimum tax of $500. Some S corps under the old system ended up paying more than the minimum tax because of franchise tax provisions. For tax years beginning on or after January 1, 2015, those S corps will pay only the $500 minimum.)

Estate tax changes

For decedents dying on or after January 1, 2015, a $64,400 Rhode Island credit will be applied to the estate tax. This will have the effect of shielding up to $1.5 million from Rhode Island’s estate tax. Thus, in effect, Rhode Island’s estate tax “threshold” – which is $921,655 for decedents dying in 2014 – will be $1.5 million for decedents dying in 2015.

Unemployment Insurance and TDI Tax Rates for 2015

The RI Department of Labor and Training announced today that the 2015 Unemployment Insurance (UI) taxable wage base will be $21,200 for most employers in Rhode Island. This represents a $600 increase from the current year. By law, the UI taxable wage base represents 46.5 percent of the average annual wage in Rhode Island.

Although the wage base limits the amount of wages that are taxable, tax rates for individual employers vary according to their experience with the UI system. These rates range from a minimum of 1.69 percent to a maximum of 9.79 percent. The lower an employer's 'experience rate,' the less tax the employer pays. Employers will be notified of their new individual tax rates in December. The 2015 rate for new employers will be 2.74 percent, a decrease of 0.11 of a percentage point from the 2014 rate.

The 2015 taxable wage base for those employers in the highest UI tax rate (9.79 percent) group will be $22,700 - $1,500 greater than the taxable wage base for all other employers, per RI law. This higher wage base, which affects approximately 16 percent of RI experience-rated employers, is intended to help offset the large drain these employers have on the Employment Security Trust Fund. Last year, 38.4 percent of all UI benefit payments were attributed to the top 16 percent of RI experience-rated employers.

The Employment Security Fund, financed by assessments from 30,924 businesses in the state, covers the cost of Unemployment Insurance benefits for RI workers. The fund's taxable wage base represents the maximum amount of an employee's earned wages that are subject to taxation in any given year.

DLT also announced today that the employee contribution rate to the Temporary Disability Insurance (TDI) Fund will remain at 1.2 percent in 2015. The TDI contribution rate has remained unchanged since 2012. The contribution rate is calculated by dividing total adjusted fund disbursements for a 12-month period by taxable wages for a 12-month period.

Also in 2015, the TDI taxable wage base will be $64,200, an increase of $1,500 over last year's taxable wage base. The maximum TDI contribution will be $770.40 next year, an increase of $18.00 from the 2014 maximum contribution of $752.40.

(TDI provides benefit payments to insured RI workers for weeks of unemployment caused by disability. Last year, approximately 403,300 workers contributed to the TDI fund. RI workers, not employers, fund the TDI system. On July 11, 2013, Rhode Island signed into law the Temporary Caregivers Insurance (TCI) program, which can provide eligible claimants with up to four weeks of caregiver benefits to care for a seriously ill child, spouse, domestic partner, parent, parent-in-law or grandparent or to bond with a newborn child, new adopted child or new foster-care child. Through the second quarter of 2014, TCI claims accounted for about 10 percent of the total number of initial TDI applications filed with DLT.)