The 2017 Tax Cuts and Jobs Act ("TCJA") limited the deduction of state and local taxes ("SALT deduction") to $10,000. In response, an increasing number of states have enacted legislation to avoid the limitation on the SALT deduction. They did this by enacting an entity-level tax (“PTET”) on pass-through entities, such as partnerships, S corporations, and limited liability companies taxed as partnerships or S corporations. The PTET passes through as a deduction to the owners. The entity-level tax can be deducted without limitation.
Connecticut enacted the first of these PTETs following the TCJA, which is mandatory for Connecticut pass-through entities. Thirteen more states subsequently passed voluntary PTET’s, including New York, New Jersey, Rhode Island, and Maryland, among others. Several other states have similar legislation proposed.
The IRS confirmed the unlimited deductibility of PTETs in 2020. IRS Notice 2020-75 clarified that the entity is allowed to deduct PTETs imposed on and paid by the entity when computing the taxable income or loss that flows through to the owners. The Notice also confirmed that PTETs do not count towards the SALT deduction for the owners.
Electing into a PTET may not be beneficial for all pass-through entities and their owners, however. For example, nonresident owners may not be able to claim a credit in their home state for taxes paid by the entity, resulting in a double tax to such owner.
While PTETs can provide substantial tax savings to owners of pass-through entities otherwise subject to the SALT deduction limitation, careful consideration should be given prior to electing into a PTET.
Please contact your Woods Oviatt attorney or the following attorneys regarding you tax planning needs:
Sarah F. Bothma, Esq.
Robert W. Croessman, Esq.
Thomas M. DiPiazza, Esq.
Danielle B. Ridgley, Esq.