With the majority of states now allowing a pass-through entity tax (PTET) election, my clients have been asking questions about PTET and what this means for their businesses.
In today’s post, I’ll explain PTET and help you determine your next steps if you qualify for this potential tax-saving workaround.
What is pass-through entity tax (PTET)?
Pass-through entity tax (PTET) is a state tax that is designed to help pass-through businesses like S-Corporations and partnerships. It seems counterintuitive that there would be a tax that helps you save tax money, so stick with me through this explanation.
This all started in 2017 when the Tax Cuts and Jobs Act was passed, because it created a $10,000 cap on the yearly state and local tax (SALT) deductions individuals can claim on their federal tax returns through 2025. This is called the “SALT cap.” In order to get around this cap, states have enacted–with the IRS’ approval–a new tax that allows pass-through businesses to elect to pay their business taxes through their state’s business tax return rather than on their state’s individual tax return.
Because the SALT cap doesn’t apply to the amount the business owner pays in PTET, that amount then becomes deductible on federal taxes. And that’s how a state tax can help pass-through entities save tax money on their federal tax returns.
How does pass-through entity tax (PTET) work in my state?
Here’s the tricky part. Since PTET is a state-mandated tax, each state has the ability to put their own spin on things. And they have. Depending on the state where you file your individual taxes, electing to pay PTET can typically allow you to do one of two things:
- you can claim a refundable tax credit, or
- you can exclude your share of the business income on your individual state tax return.
Additionally, if the state where you reside is not the same state where your company pays taxes, things can get even trickier.
My best advice for figuring out your state’s PTET is to consult a certified public accountant who can investigate and fully understand the tax laws that apply to you and your business.
Can everyone pay pass-through entity tax (PTET) to save federal tax dollars?
No. In general, if you own an S-Corporation, a partnership, or an LLC that’s taxed as a partnership, then you can elect to pay PTET if your state has enacted this election.
Also, if any of the owners of your business are a trust, C-Corporation, or own other pass-through entities, then none of the owners may qualify to make the PTET election. Again, this depends on your state’s specific statutes.
How can my business make a pass-through entity tax (PTET) election?
Well–you guessed it–this varies by state as well. Some states require that you make the election annually. Other states mandate that once the election is made, it can’t be changed for at least three tax years.
As for where to make the election, some states have physical forms that can be completed and submitted, some make it easy to elect PTET right on your tax return, and some states require everything to be completed in their online systems. All states have certain dates by which the election needs to be made, and it’s often related to the state’s timeline for estimated tax payments.
Which states have pass-through entity tax (PTET)?
As of late summer of 2023, the following states and jurisdictions either have enacted or are working to enact PTET:
Additionally, some states don’t have personal income tax, so these states won’t have PTET:
- New Hampshire
Before electing to pay PTET, you should first decide if you can and should. To ensure that you understand the process, laws, and implications, you should ask a CPA first. If you decide this election is right for you, then make sure you follow your state’s guidelines for how and when to submit the required documents and payments. If done correctly, PTET can help you save on your federal taxes, so don’t sleep on this opportunity.