By Paul Williams

Law360 (May 5, 2020, 3:37 PM EDT) -- Missouri would exempt federal pandemic relief checks from state income tax and adopt model legislation addressing changes to federal partnership audit rules under a bill approved by the state Senate.

On Monday the Senate passed S.B. 704, which would exclude stimulus payments authorized under the Coronavirus Aid, Relief and Economic Security Act from Missouri residents' federal tax liability for state tax purposes. The bill also seeks to have Missouri become the latest state to adopt the Multistate Tax Commission's model partnership audit statute that accounts for new federal partnership rules. The bill now moves to the state House of Representatives.

Missouri is one of six states with a federal deductibility provision that could result in the relief payments being subject to state income tax. Missouri's deduction applies to those with $125,000 or less in state gross income and is capped at $5,000, or $10,000 for joint filers. If the relief checks reduce a qualifying taxpayer's federal liability below those thresholds, the taxpayer's state tax liability could increase.

Under the CARES Act, the Internal Revenue Service will send $1,200 to individuals and $2,400 to couples filing joint tax returns, plus $500 for each qualifying child. The payments will be reduced for those with incomes above $75,000, or $150,000 for couples, and they will be eliminated for those with incomes of more than $99,000, or $198,000 for couples. The federal measure is a response to the outbreak of the novel coronavirus, which causes the respiratory disease COVID-19.

A fiscal note on the bill estimated that exempting the CARES Act payments from tax would reduce state tax revenues by $36.3 million in fiscal year 2021. However, the note added that the reduced amount wouldn't be a loss of revenue that the state was counting on, but rather a result of Missouri's electing not to tax the one-time relief checks.

The Senate bill would also adopt the Multistate Tax Commission's model statute partnership audit, which business community representatives have said simplifies how states can address federal partnership audit changes stemming from the Bipartisan Budget Act of 2015 .

The bill's partnership provisions would streamline the state's treatment of partnerships by requiring them to report and pay any additional tax due as a result of a federal audit or an amended federal income tax return, according to a summary of the legislation. Partnerships would have 180 days after a final federal determination to pay any additional Missouri tax owed.

The model partnership statute was also incorporated into a similar bill that was the subject of a House Ways and Means Committee hearing last week. During that hearing, Rep. Phil Christofanelli, R-St. Peters, said the partnership provisions would allow the state to "automatically capture" a partnership's tax liability that changes after an IRS audit instead of requiring each partner to file an amended return.

Missouri lawmakers are moving to adopt the state's budget before Friday's constitutional deadline and are trying to wrap up any other outstanding priorities that they think have enough bipartisan support to pass. Before passing S.B. 704, the Senate added several other tax provisions to the bill that would allow a handful of municipalities and districts to hold elections in 2022 asking voters to approve the levying of transient guest taxes and sales taxes.

The bill would also require local tax increment financing projects to be restricted to projects in redevelopment areas that are determined to be blighted after a study is conducted by a third party, according to the bill's summary.

The offices of Sen. Denny Hoskins, R-Caldwell, the bill's primary sponsor, and House Minority Floor Leader Crystal Quade, D-Springfield, did not immediately respond to requests for comment Tuesday.

--Additional reporting by Stephen Cooper. Editing by Vincent Sherry. 

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