Is a pass-through entity tax right for you?

Ever since the Treasury Department paved the way for states to enact legislation to workaround the state and local tax deduction cap, more and more states have taken advantage of the opportunity.

In late 2020, the IRS released a notice that more or less gave the green light to states for workaround legislation that, to date, 21 states have already put in place and that four others are currently working to pass.

This SALT workaround is a pass-through entity tax, or PTET, for LLCs, partnerships, and S-Corps. The way it works is instead of these business owners paying business income tax on their personal tax returns, the state assesses the tax at the entity level and the business can take a federal deduction on the business return for those taxes paid, thus lowering the federal income and tax.

As with most tax laws, the devil is in the details. In other words, no state has structured its PTET exactly the same.  For most states, the PTET is an election that can be made online or on your annually filed tax return. Others, such as Connecticut, have made it a mandatory tax.

Additionally, the way the income from your business hits your personal tax return can be treated differently.  The business income can either be excluded completely, or you may receive a tax credit to be applied on your personal return. For example, Alabama will tax the business income at the company level. The already-taxed income would be excluded from your personal state income tax return. To contrast, the state of Arizona will tax your business income at the business level and will give you an income tax credit. The business income will be included on the state personal income tax return, but you will receive an income tax credit to reduce the taxes you will owe personally.

Because of the difference in states’ treatment of the PTET at both the state and federal levels, our team of tax advisors is reviewing each of our clients’ tax situation to see if the PTET will be to their advantage.

If you have any questions, please contact your tax manager.

Zachary Collins, CPA, is a Tax Manager with our Business and Tax Advisory Group. He can be reached at zcollins@antarescpas.com.

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