Author: Nate Peterson
When it comes to our personal and business tax situation, we’ve all had that vexing thought: “Am I taking advantage of all the legal deductions available on my tax returns? Is there tax planning I can do now that will benefit me in the future?”
Basic Tax Planning Strategies
In tax planning, the basic strategies are to defer recognizing revenue and accelerate deductions. When used effectively, these planning strategies provide time value of money benefits (i.e., a dollar in tax savings today is worth more than the dollar in the future) and plan the eventual recognition of taxable income in a lower tax-rate year. Said another way, basic tax planning will kick the “tax-payment can” down the road…but eventually, you’ll pay the tax.
In the tax world, we refer to these strategies as temporary benefits. However, most taxpayers are looking for that “silver bullet” that provides a permanent tax benefit. While several tax planning strategies provide a permanent tax benefit (e.g., tax credits, qualified small business stock, opportunity zone appreciation, etc.), one is most applicable to owners of a pass-through entity (e.g., Partnership, LLC, S-Corporation, etc.) and is called the pass-through entity tax (“PTET”) benefit.
The PTET Benefit
Here is a quick history to catch you on how the PTET benefit came into existence. When the Tax Cuts and Jobs Act (“TCJA”) was being negotiated in 2017, the state and local tax (“SALT”) expenses on an individual’s itemized deduction (Schedule A) were capped at $10,000. If you paid more than $10,000 state taxes, you received no tax benefit for those payments. This result was detrimental to taxpayers in high-taxing states, especially owners of pass-through entities who reported all their business income on their tax return and paid a substantial state tax payment.
As a result of the TCJA’s SALT cap of $10,000, states with high tax rates began to think of workarounds…and thus was born the PTET benefit. Several states created laws that essentially said if the pass-through entity made the tax payment on behalf of the qualified owners, then the state would consider the tax payment a business tax deduction. The IRS initially challenged the idea but relented and issued guidance (Notice 2020-75) that confirmed the pass-through entity’s ability to deduct certain entity-level state income tax payments as federal tax deductions. If the pass-through entity made the state election (due date and how you make the election varies by state), rather than reporting the SALT payment on your itemized deduction form (Schedule A), the state tax payment would be reported on the pass-through entity’s tax return and passed through as a deduction to the qualified owner. The result to taxpayers was a successful workaround the $10,000 SALT cap.
Implementation and Guidance
Once the IRS guidance was issued, many states began to pass legislation to allow pass-through entity owners to elect to pay tax at the entity level. This was wonderful news for many pass-through entity owners since this now provided a permanent tax benefit if they made an election to participate in the states PTET program. However, this also created a lot of questions since each state would create its own way of administering its PTET program. In other words, each state has its own way of making the election, what date the election is due, when payment is due, what happens to overpayments, what happens if there’s an underpayment, and the list of questions goes on.
Contact us today!
Fortunately, tax CPAs at Tanner are familiar with each state’s unique PTET program and can provide taxpayers with guidance as to how to make the election in the states their pass-through entity is doing business. If you think your personal tax situation can benefit from the PTET program, I encourage you to reach out to a tax professional at Tanner to help you with your specific tax situation.