With the passing of the Tax Cuts and Job Act of 2017, the individual deduction for state and local taxes (“SALT”) has been limited to $10,000. Subsequent to this, New Jersey and New York and several other states have enacted an elective pass-through entity (“PTE”) tax as a workaround. This allows the owners to work around the SALT deduction limitation. There are currently twenty-one states which have a PTE tax.
According to the AICPA, states other than New Jersey and New York that have enacted PTE elections effective for 2021 include: Alabama, California, Connecticut, Idaho, Illinois, Louisiana, Massachusetts, Michigan, Maryland, Minnesota, Oklahoma, Rhode Island, South Carolina, and Wisconsin. Currently, Arkansas, Arizona, Colorado, Georgia, North Carolina, and Oregon have passed legislation and will have enacted a PTE tax effective for the 2022 tax year or later.
PTE taxes provide S corporations and partnerships with the ability to deduct state income taxes in the same manner as a C corporation. Accordingly, these pass-through entities must comply with the requirements for quarterly estimated income tax payments and any payments due with the filing of extensions requests. For many of the states the owners may be required to remit both personal estimated income tax payments and PTE estimates.
Unfortunately, as each jurisdiction has enacted their own legislation there is lacking uniformity amongst the respective jurisdictions. For instance, the PTE tax in Connecticut is mandatory, while in a number of other states allow owners to elect annually whether or not to pay the PTE tax. Once the election is made, the states vary on whether or not the election is irrevocable. For pass-through entities with considerable income in any of the jurisdictions offering a PTE election it is important to note that each state has its own filing requirements, due dates, filing and payment requirements.
For pass-through entities there may be a number of potential tax planning opportunities in making a PTE election. As is generally the case in tax planning, making these determinations as to the overall potential benefit and tax savings opportunities will depend upon the specific facts and circumstances.
