Introduction: Understanding PTET and the SALT Cap
In 2017, the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000 for individuals. This cap significantly impacted high-income earners in high-tax states, limiting their ability to deduct state and local taxes on their federal returns. To alleviate the SALT deduction limitation, many states have adopted the Pass-Through Entity Tax (PTET) strategy.
The PTET allows pass-through entities, like partnerships, LLCs, and S corporations, to elect to pay state taxes at the entity level, effectively bypassing the SALT cap on individual returns.
How the PTET Works
The PTET imposes an entity-level tax on pass-through entities, which is deductible for federal purposes. The owners or members of these entities then receive a credit or a deduction for their share of the tax paid at the entity level, reducing their overall tax liability. Since the entity pays the state taxes instead of the individual, the deduction avoids the $10,000 SALT limitation.
Here’s a PTET Tax Strategy Table showing the key details for states that have adopted the Pass-Through Entity Tax (PTET). This table can be used for your blog post to help readers compare the PTET rules across states:
| State | Eligibility | Tax Rate | Election Deadline | Credit for Owners | Notes |
|---|---|---|---|---|---|
| California | Partnerships, S Corps | 9.3% | Annually before return filing date | Credit on California personal income tax | AB 150 allows bypassing of SALT cap |
| New York | Partnerships, S Corps | 6.85% – 10.9% (sliding scale) | March 15 of the tax year | Credit on New York personal income tax | PTET effective from tax year 2021 |
| New Jersey | Partnerships, S Corps | 5.675% – 10.9% (sliding scale) | March 15 annually | Credit on New Jersey personal income tax | Known as BAIT (Business Alternative Income Tax) |
| Connecticut | Partnerships, S Corps (Mandatory) | 6.99% | N/A (Mandatory) | Credit on Connecticut personal income tax | First state to adopt PTET (2018) |
| Illinois | Partnerships, S Corps | 4.95% | Return filing deadline | Credit on Illinois personal income tax | Enacted under SB 2531 in 2021 |
| Louisiana | Partnerships, S Corps | 6% | Return filing deadline | Refundable credit | Enacted PTET in 2021 |
| Massachusetts | Partnerships, S Corps, LLCs | 5% | Return filing deadline | Credit on Massachusetts personal income tax | PTET effective from tax year 2021 |
| Maryland | Partnerships, S Corps | 8% | Return filing deadline | Credit on Maryland personal income tax | PTET implemented in 2020 |
| Arizona | Partnerships, S Corps | 4.5% | Return filing deadline | Credit on Arizona personal income tax | PTET effective from tax year 2021 |
| Georgia | Partnerships, S Corps | 5.75% | Return filing deadline | Credit on Georgia personal income tax | PTET effective from 2022 |
| Colorado | Partnerships, S Corps, LLCs | 4.4% | Return filing deadline | Refundable credit | PTET enacted in 2022 |
| Alabama | Partnerships, S Corps | 5% | Return filing deadline | Credit on Alabama personal income tax | PTET effective from tax year 2021 |
| Minnesota | Partnerships, S Corps | 9.85% | Return filing deadline | Credit on Minnesota personal income tax | PTET effective from tax year 2021 |
| Oregon | Partnerships, S Corps | 9% (up to $5 million), 9.9% (above $5 million) | March 15 annually | Credit on Oregon personal income tax | PTET adopted for tax year 2021 |
| South Carolina | Partnerships, S Corps | 3% | Return filing deadline | Credit on South Carolina personal income tax | Enacted PTET in 2021 |
| Wisconsin | Partnerships, S Corps | 7.9% | Return filing deadline | Credit on Wisconsin personal income tax | Wisconsin PTET has been in place since 2019 |
| Arkansas | Partnerships, S Corps | 5.9% | Return filing deadline | Credit on Arkansas personal income tax | PTET enacted for tax year 2022 |
| Rhode Island | Partnerships, S Corps | 5.99% | Return filing deadline | Credit on Rhode Island personal income tax | PTET adopted fo |
Key Considerations for PTET Election
While the PTET can provide significant tax savings, there are several factors that pass-through entities and their owners must consider:
- Federal Deductibility: The entity-level tax is deductible for federal purposes, potentially reducing the federal taxable income.
- Election Timing: Most states require an annual election, and the deadlines vary.
- Tax Credit Management: Owners must ensure proper credit application on their personal income tax returns to avoid double taxation.
- State-Specific Rules: Each state has unique rules for PTET elections, so entities operating in multiple states may need to navigate different tax treatments.
Conclusion: Is PTET Right for You?
The PTET election can be a valuable tool for pass-through entities looking to bypass the SALT cap and maximize tax deductions. However, the decision to elect PTET should be made carefully, considering the specific rules in each state where the business operates. Consulting with a tax advisor is essential to ensuring compliance and optimal tax planning.
Call to Action
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