Although various states passed legislation allowing for PTET elections, states have issued limited guidance, and what has been issued still leaves questions unanswered. Based on the IRS notice’s description of the types of state tax payments that will qualify, it’s possible that some existing state PTET laws will result in taxes that won’t be deductible at the federal level.
When it comes to state taxes, the rules and regulations tend to differ and therefore the tax consequences of a PTET election could vary significantly depending on the state in which it’s made and the taxpayer’s individual circumstances. Each state’s rules need to be thoroughly reviewed to determine if a PTE is eligible to make the election as these requirements vary by state in addition to other factors. For instance: Does an election negatively impact a PTE owner’s overall tax liability? Are there limitations contained within the statutes as to how credits for PTET can be claimed in the owner’s resident state as well as limitations on the ability to claim credits for PTET paid to other states? Situations may exist where one partner receives a larger tax benefit compared to others. If an election is made, owners should consider whether there is a need to revise partnership agreements or other legal documents.
Additionally, the entity-level tax rate in many states is higher than the individual tax rate. These rate differences must be considered in determining if there is a material difference in the amount of state tax due if such elections are made. Taxpayers that have PTE income subject to tax in affected states will need to work closely with their tax advisors to determine how to apply the most recent guidance available to their specific facts and circumstances
