Georgia Pass Through Entity Tax Deduction (PTET) for S-Corp

[Michael16]

I am considering converting my sole proprietorship to an S-Corporation. I want to better understand the tax implication, including my state (Georgia) pass-through entity tax (PTET) deduction.

Let's say I am the sole business owner of an S-Corp. I elect Georgia's PTET (5.49% for 2024). My business has an annual revenue of $120,000 with $20,000 in business expenses. I pay myself $50,000 as its employee plus $3,825 in employer FICA and $42 FUTA payroll taxes. I also provide an employer match to my Solo 401k of $12,500. This leaves me with a business profit of $33,633 ($120k-$20k-$50k-$12.5k-$3,867).

Is the state tax credit determined by the PTET based on the business profit (in this example $33,633, so after W-2 and payroll taxes)?

So I would pay income tax on my individual return for the $50,000 W-2 earnings but the state taxes on the business profit (paid in the year they were received through quarterly estimated payments) would be paid at the entity level, correct? This entity payment would then be credited against my personal state income tax. Am I interpreting this correctly?

Lastly, would the state standard deduction also apply to the PTET elected (entity paid) state taxes?

[Mike9241 · Accepted solution]

The Pass-Through Entity Tax (PTET) is an optional state income tax that taxpayers may elect to use. It is designed to address the adverse impacts of the SALT (State and Local Tax) cap imposed by the federal Tax Cuts & Jobs Act (TCJA) of 2017. Here are the key points about PTET:

1. Purpose: The PTET aims to mitigate the limitations of the SALT cap, especially for individuals with ownership interests in entities classified as partnerships or S-Corporations (also known as pass-through entities).

2. Levied on Entities: The PTET is levied on an entity that is classified as a partnership or an S corporation for both federal and state income tax purposes.

3. Tax Reduction Mechanism: The pass-through entity can reduce its ordinary income by the amount of PTET paid, similar to how it handles payroll taxes and other state and local taxes. As a result, the direct partners, members, or shareholders of the electing entity have lower federal income. Additionally, they do not pay state taxes on the business income.

4. Benefits:

   • Avoiding SALT Cap: The most significant benefit of PTET is the ability to avoid the $10,000 SALT deduction cap. Owners of eligible entities can deduct a larger portion of their state income taxes paid against federal income.
   • Not Subject to Alternative Minimum Tax (AMT): Unlike SALT deductions, PTET is not subject to the AMT, which limits tax benefits for high-income earners.

5. Considerations:

   • Straightforward Decision: For eligible entities owned by individuals residing in the same state where the entity files state tax returns, electing into PT

so for federal you're adjusted gross income would include the wages and business income net of the PTET 

for state you should get either a subtraction for the business income net of the PTET or a credit (most common) for the amount of PTET tax.  

[Michael16]

To be clear, the business income *would* include W-2 wages?

It seems W-2 wages from the business should appear on my federal 1040 (Schedule A), not forms 1120-S (entity level), while ordinary business income (line 22 from from 1120-S --> https://www.irs.gov/pub/irs-pdf/f1120s.pdf) would be the profit ($33,633 in the example above) subject to the PTET election. Is that not correct?