More States Implementing Passthrough Entity Tax (PTET)
As Workaround To The $10,000 State And Local Tax Cap
We are seeing more states moving ahead with adopting and implementing new passthrough entity taxes (PTETs). States are enacting these laws as a workaround to the $10,000 cap on the federal deduction for state and local taxes on personal tax returns for tax years 2018 through 2025 enacted by the Tax Cuts and Jobs Act.
A PTET is a state or other jurisdiction’s mandatory or elective entity-level income tax on partnerships and/or S corporations. The IRS stated that the payment of a PTET to domestic jurisdictions is deductible in computing the entity’s non-separately stated income or loss and is not taken into account in applying the cap to an individual partner or shareholder in the entity. Members of partnerships and shareholders of S corporations receive a credit against their state taxes on their state personal tax returns for their individual allocable share of the above PTET paid by the partnership or S corporation.
As of May 31, 2023, 36 states and one locality had enacted a PTET, including seven states in 2023, in four of which a PTET is effective retroactively to 2022 — Indiana; Iowa; Kentucky; and West Virginia — while Montana and Hawaii‘s PTETs are effective in 2023 and Nebraska‘s PTET is effective retroactively to 2018.
In addition, three states have proposed PTE tax bills in 2023. Two of these states recently introduced bills (Maine and Pennsylvania). The state Senate in Vermont passed a bill that is now being considered in the House.
So far in 2023, PTET modification bills have been enacted in four states (Georgia, Kentucky, New Mexico, and North Carolina) and introduced in five other states (Minnesota, Mississippi, New York, Oregon, and Virginia). A common modification is to expand eligibility for partnerships with entities as partners.
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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.