The Alaska LNG gasline bill, HB 381, has sparked debate over a proposed tax on pass-through entities, which would impact small businesses in the oil and gas industry. This tax, often referred to as closing the S-corp loophole, would actually apply to any pass-through entity, including sole proprietorships, partnerships, and LLCs that earn oil and gas-related income in Alaska.

Impact on Small Businesses

The structure of an S-corp is not a loophole, but a way for small businesses to avoid double taxation. A corporation may only be taxed as an S-corp if there are fewer than 100 shareholders, making the structure best for small to medium, local businesses. Rather than pay a corporate income tax, the tax passes through to the shareholders, who pay federal income tax on profits when they file their individual taxes. Because Alaska does not impose a State income tax on individuals, shareholders who make profits under an S-corp structure do not pay taxes to the state.

However, Democrat legislators have been working to dismantle the S-corp structure that protects small-to-medium Alaskan businesses and instead force a particular sector of those businesses to pay an arbitrary State income tax. According to a presentation by the state’s Department of Revenue, the pass-through tax in the current version of HB 381 is a relatively novel concept and may have unintended consequences and unforeseen difficulties with compliance and administration.

Concerns and Criticisms

F. Steven Mahoney, J.D., C.P.A., an accountant on behalf of Glenfarne Alaska LNG, raised concerns to legislators regarding the tax on pass-through entities. Dr. Mahoney pointed out that there has been no meaningful analysis on whom and how the tax structure works in practice or application using Alaska’s existing Corporate Income Tax framework. Additionally, Dr. Mahoney told legislators that forcing pass-through entity tax into the Corporate Income Tax structure does not work.

The new tax on pass-through entities would hit sole proprietorships, partnerships, and LLCs that earn taxable income from the production of oil or gas from a lease or property in the state. These businesses would be subject to bracketed tax rates, which could burden small businesses and chill investment in the state.

Original reporting: Must Read Alaska (Anchorage) — read the source article.