State Pass-Through Entity Tax law changes allow owners to mitigate SALT deduction limits
Recently several states have enacted legislation for a pass through entity (PTE) tax, including states with high income tax rates like California and New York. A PTE tax provides for a state income tax deduction for owners at the entity level, rather than as an itemized deduction on their personal tax return, for which they may not receive a tax benefit due to the $10,000 limitation on state and local taxes.
The rules vary for each state, but generally:
- The entity level tax rate is usually a flat rate and often times different than the personal level tax rate.
- Some states (like California) still assess a personal level tax to the owners, but then allow a credit for the state tax paid at the entity level.
- The PTE tax for some recent states are effective next year (starting 1/1/22), while others like California and New York, are effective starting in 2021.
- Most states allow for an annual election, but due date varies. For some the election is due by the original due date of the return (including extensions), while others have a due date within the effective tax year. New York has due date is 3/15/21 for a 2021 election, but is allowing the election to be made by 10/15/21 for this first year.
Your should consult with your tax professional to determine if the PTE tax election for any applicable states should be considered. Such an analysis usually requires research and modeling to determine if the overall result is tax efficient and equitable for all owners and thus discussions should begin as soon as possible. Please contact a ShindelRock tax professional.if you would like to start the process.