If your LLC partnership elects to use the "Pass Through Entity Tax" form (PTET), does it apply to each partner's K-1 income only, or does it also apply to guaranteed payments?

[danielle-51]

This is the first year our state of Arkansas has the provision for a partnership to use the PTET form. I am new to this, and was wondering if it would be beneficial or not for our LLC.  It made me wonder if this PTET is for each partner's share of income as reported on their K-1's, or does it apply to guaranteed payments as well? It doesn't seem like it would be worth the trouble to change everything if it is only for the profit of each partner as reported on the K-1's. In our case, we are a small family business, and most of the income for each partner is in the form of guaranteed payments, not distributions. So most of the state taxes owed are from the guaranteed payments, not the K-1's.  Everyone takes the standard deduction, so the fact that there is no more SALT cap of $10,000, is of no benefit to us since no one itemizes deductions. I am having trouble seeing the benefit for us.

I hope this makes sense, I am barely familiar with this new PTET option. Thank you.

[PatriciaV · Accepted solution]

Yes, according to the Instructions for Arkansas Pass-Through Entity Tax, guaranteed payments are reported as taxable income on the member's AR individual tax return. The PTET paid on behalf of the members does not include tax on guaranteed payments. 

However, if the LLC reports significant net income for the year, the payment of state taxes by the company may be beneficial to the members. You may wish to test both options to compare the outcome at the level of the members.

[danielle-51]

PatriciaV, thank you. I didn't know if anyone was going to understand what I was asking. I remembered you as an expert in LLC tax matters, and I was hoping you would see my question when I submitted it yesterday. I appreciate your response. So, if I am understanding your answer correctly, it means that the PTET is only relevant for the state tax owed on the profit from the business, and NOT state tax owed on income from guaranteed payments. That does make sense to me.

[PatriciaV]

Yes, in Arkansas, the PTET covers only the partnership income. Guaranteed payments are income to the recipient and taxed at that level.

[danielle-51]

Again, thank you, PatriciaV. It looks like for us the standard deduction for each partner would be the bigger deduction. Am I correct in thinking you only use the PTET form if you are itemizing deductions? 

For our partners, the state tax you would be allowed to deduct would be less than the standard deduction. (And there are no other significant deductions that could also be itemized.)

So, I am concluding that for now, we should keep it as it is. 

If I have misunderstood anything please let me know.

Your responses have been very helpful.

[PatriciaV]

It depends. The PTET credit applies to State Income tax, which means the payment may make a difference to a partner's state tax return. In essence, the partnership is paying the state tax on behalf of the partner, so they have a credit against their state tax liability. 

On the federal side, the state tax is deductible only if the partner is eligible to itemize deductions. This is where the PTET may or may not make a difference on the partner's federal tax return.

Bottom line: if the income is insignificant, PTET may not be the best option. But if the state tax on that income would make a difference to the partner, then you may decide to have the partnership make the PTET payment.