Using State-Level PTE Tax To Bypass TCJA’s SALT Limitation

April 26, 2022
“[The PTE tax] really can get a little complicated. You really have to just draw it out, no matter what situation you’re in, and put everything to paper and figure out [] how much of a benefit is this, and how much is it for each individual.”

The pass-through entity (PTE) tax has been a hot topic for many states, and it has evolved significantly over the 2021 tax year. In this episode of Savvy & Sensible, ARBers discuss the progression of the PTE tax and what partnerships, their partners, S corporations, and their shareholders need to know. 

In 2017, the Tax Cuts & Jobs Act (TCJA) limited the amount of state and local taxes (SALT) – including income tax, real estate tax, personal property tax, and excise tax – that individuals can deduct against their federal taxable income to $10,000. Since then, many states have developed creative methods to circumvent this limitation. 

Connecticut was the first state that introduced a workaround whereby the pass-through entity pays a PTE tax that’s deductible at the business level; therefore, the partners or shareholders of these pass-through entities can bypass the TCJA’s $10,000 limit. The IRS has since issued a notice that essentially states that this is a valid workaround applicable to partnerships and S corporations; however, the notice is not substantial authority, and future official regulations may change the way these workarounds apply.

Originally, there were eight states with PTE tax, but by the end of 2021, there were more than 20. In the New England region, that includes Connecticut, Massachusetts, Rhode Island, and the neighboring State of New York. Every state is implementing this differently, so each state’s system differs slightly in terms of whether it’s elective or required, how it’s computed, and how it’s potentially credited to the shareholders or partners. 

Pass-through entities need to look at it on a state-by-state level. Start by looking at the partner/shareholder states of residence to determine if the credit they get for tax paid to other jurisdictions is more valuable than the deduction for federal purposes and whether there is value in the credits for taxes paid to other states. Pass-through entities should also determine if the benefit of the credit outweighs the administrative headaches, as there may be issues related to ownership dynamics or S corporation distributions. And because the SALT limitation is one of many TCJA tax provisions set to sunset after 2025, the PTE deduction may not be an effective long-term solution. 

Contact Albin, Randall & Bennett

To determine the best solution, you really have to put everything on paper and figure out how much it will benefit each individual. But it’s a great conversation to have because it may be beneficial in your situation. Please feel free to reach out to John Hadwen or David Jean if you have any questions.

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