If the partnership pays PTET in April 2023, how does the credit flow to members' 1040?

[Sandpiper21]

My wife and I are 2 members of a partnership, owning a rental property in VA, while we are residents of NY.  I just finished filing the federal 1065 and issuing K1 to ourselves.  In the past, we would file a partnership return with VA as informational only, without paying anything.  Then we would file personal income tax return with VA and pay tax to VA.  And the tax we paid to VA would be a credit on our NY personal income tax return.

This year, VA gave me an option to pay an elective tax for the partnership, so I did the VA 502PTET and elected to pay a PTET in April 2023. Now I am doing our personal federal return 1040 and I cannot figure out how the PTET credit should flow to us as members.  There is nothing in the K1 that reflects the PTET paid to Virginia.  I thought the idea of PTET is to circumvent the SALT cap, so it should show up on the 1040 somehow.  Is my understanding correct?  (PTET paid to VA will definitely count as credit on our NY return, but we would have gotten this credit anyway by paying tax to VA via our personal tax return.)

I filed 1065 first, then filed Virginia 502PTET.  Was that a mistake?  Should I have done the VA tax return for the partnership first, then filing the federal 1065? Is there a field in 1065 (and K1) that I should have made an entry for the VA PTET in order to show the tax credit paid to VA? 

[PatriciaV]

No, the order in which the business returns were filed would not affect reporting PTET.

In TurboTax Business, you must complete Schedule PTET Adj in order for the paid tax to be included on the Virginia Schedule VK-1. You can do this using Forms Mode (click the Forms icon in the TurboTax Business header).

1. Open Form 502, PTET and check the box at the top to elect to pay the Virginia income tax at the entity level.
2. Confirm that no other boxes on this form are red. (If you click the Errors icon above the forms list, you'll see the error description under the open form.) Correct as needed.
3. Open PETEADJ and scroll down to Part III, Line 10. Enter the amount of PTET tax that was paid. Confirm there are no errors on this form.
4. Open Sch VK-1 for one of the partners. Part III Line 10 should display the allocated portion of the PTET tax that was paid.
5. When you're finished, click Step-by-Step in the header to return to the main screens.

Use the revised Schedule VK-1 to report the PTET on your personal tax return.

[Sandpiper21]

PatriciaV,

Thank you for the answer.  You are saying, when I fill out 1040, I should use the information from VK-1, not the K-1 that came from the 1065, right?  

However, just for my understanding:  1065 and its associated K-1 are filed with IRS, while VK-1 is only filed with state of VA.  When IRS process our 1040, they don't  know what's on my VK-1.  Wouldn't IRS's computer flag the discrepancy between what I entered on the 1040 vs what they had received from the 1065?

[PatriciaV]

No, you first enter Schedule K-1 on your federal tax return (under Federal Taxes >> Business Items >> Schedule K-1, etc.). 

Then when you work through the Virginia state section (under States), you make adjustments and/or entries that are different on Schedule VK-1. The information on Sch VK-1 is specific to your Virginia State tax return, so it's used only in that section of TurboTax. This includes the Virginia PTET tax that was paid by the partnership on your behalf.

[Sandpiper21]

PatriciaV,

Based on my understanding, the whole PTET thing is a way for us to bypass the SALT cap, i.e. shifting state income tax to the partnership, and therefore allowing the members of the partnership to deduct more from my federal income.  In other words, there has to be a benefit for my 1040 filing.  

That's why I asked this question in the first place -- where is this benefit reflected in my 1040 filing?  It has to come through the K-1, right?  But my K-1 currently from the 1065 doesn't reflect any PTET paid to the state of VA, because I did 1065 first, before I filed VA502PTET.  Did I do the 1065 wrong?  I guess there are actually 2 questions here. 

(1) Should the 1065 reflect the PTET paid to VA?  If yes, where? 

I am assuming it should be an expense against the income?  Because the partnership only owns a rental property, the first page of 1065 is all blank.  The income shows up only in form 8825.  So should the PTET payment be listed on the first page of 1065 line 14 "taxes and censes", or should it be listed in 8825 line 11 "taxes".   

(2) Timing: I paid the PTET in 2023, so do I have to wait until next year to show the payment as an expense in the 1065, or is there a way for me to work it in this year's return? 

Thanks for all your help.

[PatriciaV · Accepted solution]

PTET is a state pass-through tax election, not a federal tax credit. The benefit from the partnership paying taxes on your behalf is reflected on your State tax return this year, since you claim the credit at the state level. This payment will reduce the federal income from the partnership next year (see below).

If your business uses the cash method, you cannot accrue the payment made in 2023 on the 2022 tax return. You'll wait to report that as a 2023 business expense. This will likely be the case again next year, so there should not be a cumulative effect on your business income.

On next year's return, report the PTET tax payment as a business expense on Form 1065 Line 14. The taxes were for the business, not your rental property, so this amount would not be reported on Form 8825.

Preparing the 1065 without the PTET payment is correct in this case. The State tax calculation is based on the actual 2022 net income. 

[Sandpiper21]

PatriciaV,

What you said makes perfect sense now.  Thank you.  

[June YW]

Hi Patricia,

I have a similar question. I filed 1120S and VA 502 PTET for 2023. I entered the VA502 PTET tax (which is business income x 5.75%) and entered the VA PTET tax amount in 1120S line 12  "taxes". Is it correct?

Regarding estimated tax paid in 2023, I re-allocated the PTET tax amount from my SSN to EIN per VA's Q&A.

However, I cannot the place to enter estimated tax paid on VA502 PTET.  Can you please help?

Also, since I have allocated a portion of estimated tax paid to EIN, should I subtract this amount from the total est. tax paid and entered the remaining in my personal VA tax return?

[PatriciaV]

All PTET tax paid by the S-Corp in the current tax year should be reported on Form 1120S Line 12. This would include the portion allocated to the EIN, not the entire amount you paid under your SSN.

@June YW