Critical Updates on the Pass-Through Entity Tax (PTET)
We have some critical updates on the pass-through entity tax (PTET), which has recently become the rule in most states rather than the exception.
The PTET enables owners of pass-through businesses, such as S corporations and multi-member LLCs, to navigate around the $10,000 annual limit on state and local taxes (SALT).
How PTET Works
The PTET process is relatively straightforward. A pass-through entity (PTE) can choose to pay state income tax on its business income, which would otherwise pass on to its owners.
The PTE then claims a federal business expense deduction for these state income tax payments. Next, the states allow the owners to claim a credit or a deduction for these taxes, which avoids the SALT limit.
Consequently, owners benefit from the federal deduction against their state income tax and avoid the $10,000 SALT limit on some or all of their pass-through income.
State Updates
Currently, 36 of the 41 states imposing income taxes have adopted some form of PTET. So far, in 2023, Hawaii, Indiana, Iowa, Kentucky, Montana, Nebraska, and West Virginia have enacted a PTET.
Of these, Indiana, Iowa, Kentucky, and West Virginia have made their PTET retroactive to 2022, while Nebraska’s new PTET is retroactive to 2018. Hawaii’s and Montana’s PTETs are not retroactive.
Eligibility
In all states with a PTET, partnerships, S corporations, and multi-member LLCs taxed as partnerships or S corporations are eligible to elect to pay a state PTET. Sole proprietorships, single-member LLCs taxed as sole proprietorships, C corporations, trusts in most states, and LLCs taxed as C corporations are not eligible.
Deadline for PTET Election
No state (except Connecticut) requires a PTE to pay a state PTET; the PTE must elect to do so. The due dates for making the PTET election vary from state to state.
PTET Opt-Outs
In most states, a PTET election is binding on all the PTE’s owners, and individual owners cannot opt out. The only exceptions are Arizona, California, New York, and Utah.
