Pass-through entity tax election due dates are fast approaching in several states

The Tax Cuts and Jobs Act of 2017, also known as the TCJA, limited the deduction of state and local taxes by individuals to $10,000 per year for the tax years 2018-2025. This SALT cap, as it’s become commonly known, was highly controversial in some states.  

Before 2018, the SALT deduction was unlimited. As a workaround to the TCJA SALT cap, over 30 states, and NYC, have enacted or have proposed passthrough entity (PTE) taxes. However, in order to take advantage of these PTE taxes, most states require elections by the entity, and several are rapidly approaching, both for the 2022 and 2023 tax years. 

The details of what exactly pass-through entities are, when the IRS greenlit PTEs, and which states have enacted or proposed pass-through entity taxes are covered below. But first, there are several deadlines rapidly approaching for taxpayers wishing to elect PTE for both tax year 2022 and 2023.

Approaching deadlines for tax year 2022 pass-through entity (PTE) elections  

• April 15: Louisiana, Maryland, Mississippi, New Jersey, and Rhode Island

Recently passed deadlines for tax year 2022 and 2023 PTE elections 

• March 15: Michigan (2022)
• March 15: Alabama, New York State, and New York City (2023)

What is a PTE?

The pass-through entity tax (PTE) allows partnerships, S Corporations and LLCs to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election owners, partners or shareholders normally can either claim a state tax credit for their share of the PTE tax or may exclude their share of the PTE's income in computing their state income tax. 

IRS gives PTEs the greenlight

On Nov. 9, 2020, the IRS issued Notice 2020-75, essentially green-lighting these PTE taxes by providing that partnerships and S corporations may deduct their SALT payments at the entity level in computing their taxable income or loss.  

While the agency indicated that regulations would be issued, such guidance has yet to be provided, leaving tax practitioners and state regulators waiting. 

PTE taxes differ from state to state

As the AICPA has pointed out, “the rules vary based on many factors, such as eligibility, election method, frequency (annual or one-time), tax base and rates, how and when to pay, filing forms, allowance of state credit for entity tax paid to another state, interaction with other state tax rules, etc.”1  

Each state’s PTE tax rules must be reviewed carefully to ensure that decisions regarding whether or not to make an election should be made and the appropriate manner and timing to do so. 

States that have enacted or proposed Pass-Through Entity Tax

Thirty states and one locality have enacted a PTE tax since the Tax Cuts and Jobs Act SALT cap / limitation was first put into place, all effective for tax year 2021 (unless noted otherwise). Those states are: 

• Alabama
• Arizona (effective in 2022) 
• Arkansas (effective in 2022) 
• California 
• Colorado (retroactive to 2018) 
• Connecticut (mandatory) 
• Georgia 
• Idaho 
• Illinois 
• Indiana (effective in 2022) 
• Kansas (effective in 2022) 
• Louisiana 
• Massachusetts 
• Maryland 
• Michigan 
• Minnesota 
• Mississippi (effective in 2022) 
• Missouri (effective in 2022) 
• New Jersey 
• New Mexico (effective in 2022) 
• New York State and New York City (learn more about how to NYS PTET and how to elect in this article)
• North Carolina (effective in 2022) 
• Ohio (effective in 2022) 
• Oklahoma 
• Oregon (effective in 2022) 
• Rhode Island 
• South Carolina 
• Utah (effective in 2022) 
• Virginia (2021-2025) 
• Wisconsin 

An additional five states have, as of the publish date, proposed pass-through entity tax legislature in committee. Those states are:  

• Hawaii 
• Iowa 
• Kentucky 
• Vermont 
• West Virginia 

There are nine states that do not have a personal income tax, and therefore have no owner-level personal income tax on pass-through entity income. Those states are: 

• Alaska 
• Florida 
• New Hampshire 
• Nevada 
• Tennessee 
• Texas 
• Washington 
• Wyoming  

And finally, there are seven states or localities with owner-level personal income tax on pass-through entity income that have not proposed or enacted PTE taxes. Those states are: 

• Washington, D.C. 
• Delaware 
• Maine 
• Montana 
• Nebraska 
• North Dakota 
• Pennsylvania  

Learn more about pass-through entities and pass-through entity taxes with a free trial to CCH AnswerConnect.