Where to deduct state PTE tax on federal return?

[T2019T]

I have a single-member LLC and a partnership, both of which I have made an election to pay my state's pass-through entity (PTE) tax for as a SALT workaround. Where on my federal return do I enter these PTE tax amounts as deductions?

For the single-member LLC, would it be Schedule C, Line 23 (Taxes and Licenses)? For the partnership, would it be Form 1065, Line 14 (Taxes and Licenses)? Or elsewhere? Thanks.

[tagteam]

Which state? Also, a single-member LLC is not a PTE.

@Rick19744 

[T2019T]

California. I am considering making the election for the SMLLC to be taxed as an S corp.

[tagteam]

Those state fees would clearly be deductible on your federal income tax returns (1040, 1120-S, 1065, as the case may be).

[Rick19744]

A number of comments on this:

• This is an area that has evolved quickly and is not consistent among the various states that have enacted legislation in this area.
• California, as with many areas, has its own set of rules.  See the attached link for some guidance:
  • https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html
  • This assumes that your partnership was organized in California.
• You don't mention what year you are dealing with.  If it is 2021, this is most likely a moot point as any state that requires an election most likely requires that the election be timely made.
• You also note that "you are considering an S election for the SMLLC".  If that is the case, the PTE tax option is moot for this entity as it is not an S corporation at this time.
• The IRS issued Notice 2020-75.  The notice clarifies that any PTE tax (the notice refers to this as a Specified Income Tax Payment) is not taken into account as a separately stated item.  This means that the tax is deducted in arriving at ordinary income on page 1 of the 1065 or 1120-S.
• Your facts are very minimal and this is an area that varies by state; eligibility, election method, tax base and rates, filing forms, interaction with other state tax rules, etc. 
• As a result, I strongly suggest you meet with a tax professional to discuss this.  If this is something you are considering, since I assume that the state tax exceeds $10,000, then don't be penny wise and pound foolish in this area.  A fee to get tax advice in this area will definitely be worth it.

[katonaleegp]

@Rick19744 et al., Do you happen to know, for CA and for a General Partnership, how much of the PTE Tax you may deduct on Federal Taxes?  Suppose you pay PTE Tax in-part during the tax year (e.g. estimated payment) and part of the PTE Tax *after* year-end (e.g. assume the partnership uses calendar year not fiscal year for tax purposes and the residual PTE Tax is paid in the following calendar year).  May you deduct the entire PTE Tax (9.3%) assessed, or only whatever was paid *during* the tax year?

[Rick19744]

The general rule for taxes is a deduction when economic performance has occurred.

This is an area, economic performance, that is beyond the scope of a forum discussion.

As a result of the PTET legislation of a number of states, the IRS released Notice 2020-75.

This notice provided some guidance, but there are still some unaddressed areas.

In your case, I would recommend that you deduct any PTET at the federal level when actually paid.

[katonaleegp]

Thank you!