Questions to consider before electing into a PTE tax.

• Date: 01 September 2022
• Author: Bell-Jacobs, Moshe,Sherr, Eileen Reichenberg
• Published date: 01 September 2022
• Author: Bell-Jacobs, Moshe

As many CPAs are aware, the $10,000 state and local tax deduction limitation (SALT cap) for individuals was included in the federal law known as the Tax Cuts and Jobs Act, P.L. 115-97, enacted at the end of 2017. As a possible workaround to the SALT cap, states started to enact passthrough entity (PTE) taxes, with Connecticut being the first state to do so as a mandatory tax, after which other states started enacting PTE taxes as an elective tax.

On Nov. 9, 2020, the IRS issued Notice 2020-75, which clarified that partnerships and S corporations may deduct their SALT payments at the entity level in computing their nonseparately stated taxable income or loss. The notice indicated that the IRS intended to propose regulations to this effect, but as of mid-2022 the Service has not issued any further guidance.

The owners of PTEs (partners, shareholders, and LLC owners) generally either may be allowed a state tax credit for their share of the PTE tax or may exclude their share of the PTE's income in computing their state income tax.

Twenty-nine states have enacted a PTE tax, including most recently Missouri, which, as of this writing, is expected to sign one into law in the next few weeks. The 29 states are Alabama, Arkansas,* Arizona,* California, Colorado (retroactive to 2018), Connecticut (mandatory), Georgia,* Idaho, Illinois, Kansas,* Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,* Missouri,* New Jersey, New Mexico,* New York, North Carolina,* Ohio,* Oklahoma, Oregon,* Rhode Island, South Carolina, Utah,* Virginia, and Wisconsin. Additionally, New York City* has also adopted a PTE tax. Those marked with an asterisk are effective in 2022 or later.

Most states' PTE taxes are effective beginning either in 2021 or 2022. Colorado recently revised its PTE tax to be retroactive to 2018. Pennsylvania (H.B. 1709) currently has a proposed PTE tax bill. Iowa (H.F. 2087) and Vermont (H. 527) also had proposed PTE tax bills in 2022, but their sessions have now ended without enacting them.

There are nine states with no owner-level personal income tax on PTE income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

The 10 remaining states with an owner-level personal income tax on PTE income that have not yet proposed or enacted PTE taxes are Delaware, Hawaii, Indiana, Kentucky, Maine, Montana, Nebraska, North Dakota, Vermont, and West Virginia.

Unfortunately, the states have taken differing approaches to their PTE taxes. The rules vary based on many factors, such as eligibility, election method, frequency (annual or one-time), tax base and rates, how and when to pay, filing forms, allowance of state credit for entity tax paid to another state, interaction with other state tax rules, etc. It is important for practitioners and taxpayers to read Notice 2020-75 and the relevant state's PTE tax statute and any guidance and forms from the state tax agency prior to making any decisions.

The AICPA State and Local Tax Technical Resource Panel (SALT TRP) has been closely tracking PTE tax developments and, among other things, has created an interactive U.S. map that links to state-specific information. Members of the SALT TRP (and the AICPA SALT Deduction PTE Tax Task Force) also have pooled their knowledge to compile four lists of questions to consider in...