New York and Georgia have now added to the growing number states enacting measures to work around the cap on state and local tax deductions.
The 2017 Tax Cuts and Jobs Act placed a $10,000 cap on the deduction, which was a blow to residents in high tax states.
Since TCJA was enacted, various states have tried to create workarounds for residents. And as we previously shared, the IRS now allows business owners to benefit from state and local taxes imposed, paid and deducted at the S corporation or partnership – including LLC – level without having to worry about the SALT deduction cap.
When the IRS made the announcement back in November, only Connecticut, New Jersey, Louisiana, Oklahoma, Rhode Island and Wisconsin had some type of pass-through entity tax. Most recently, Georgia and New York enacted similar laws.
New York established a pass-through entity (PTE) tax where partnerships and S corporations can elect to pay taxable income with direct partners or shareholders being entitled to a refundable tax credit for their share of the tax paid by the entity. New York’s law, which is applicable beginning January 1, 2021, includes four tax brackets:
- 85% for income below $2 million;
- 65% for income between $2 million and $5 million;
- 30% for income between $5 million and $25 million; and
- 90% for income over $25 million.
Pass-through entities must make an election by March 15 each year if they wish to pay the PTE tax. Since the law just passed in April, entities have until October 15, 2021, for the 2021 tax year.
Georgia’s PTE tax is applicable beginning January 1, 2022. Unlike New York where individuals report the PTE tax as a credit, in Georgia the PTE tax is excluded from an owner’s individual income. This could result in the owner showing no Georgia income and therefore not being eligible for any other personal income tax credits.
The Georgia PTE tax is paid at a rate of 5.75% on net income. An annual election must be made each year by the due date of the entity’s annual tax return, including any extensions. In other words, the election may be made as late as September 15 of the following taxable year.
If you are an owner of a pass-through entity in any of the states that has established a PTE tax, it may be beneficial to take advantage of these taxes, especially since tax increases and limits on business deductions are likely to occur in the next year or so.
Please let us know and we can help walk you through different scenarios to see what works best for you.
Lawron DeLisser, CPA, is a Senior with our Business & Tax Advisory Group. She can be reached at firstname.lastname@example.org.