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:
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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).
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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.
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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.
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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.
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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.
