As we are quickly nearing the state tax compliance deadlines, pass-through entities (PTEs) and their owners are increasingly more aware of these taxes. The passage of the Tax Cuts and Jobs Act (TCJA) in December of 2017 limited a taxpayer’s ability to itemize deduction for state taxes to a maximum of $10,000. In response, several states have enacted an elective entity-level tax. The entity-level tax is paid at the entity level and therefore is federally deductible. With the publication of Notice 2020-75, the Internal Revenue Service (IRS) clarified that such entity-level taxes would be deductible in calculating federal taxable income.
To provide context, Connecticut was the first to enact a PTE, with several states following suit, including, but not limited to, New York, New Jersey, California, Maryland, and Rhode Island.
One of the most recent states to enact a PTE is New York. This will be effective for tax years beginning on or after January 1, 2021. For the initial year, the election to participate in the entity level tax must be made no later than October 15, 2021. For tax years beginning on or after January 1, 2022, eligible entities may make the election after January 1, but no later than March 15th. The election, once made for the tax year, is irrevocable.
In determining whether to make this election, there are a number of key items that should be considered. For example, entities should analyze the structure, specifically for tiered structure pass-throughs and the resident and non-resident status of the owners and owner tax type.
PTEs and their owners should take these taxes into account when determining the impact at the entity and owner levels. Pass-through entity tax rules and due dates are specific to each state. Please feel free to contact SobelCo for more information.
