Pass-Though Entity Tax Elections At The State Level

Article | August 26th, 2022

published by Taylor Luetkemeyer, Director of Tax

30 states are allowing pass-through entities (PTEs) to elect to be taxed at the entity level , which is meant to help individuals avoid the $10,000 state and local itemized deduction limitation.

States making the PTE election typically fall into one of two groups:

  • Group 1: Allow members to reduce their adjusted gross income by their share of income from an electing PTE
  • Group 2: Require members to include their share of PTE income in their AGI but allows a tax credit of the income taxes paid by the PTE
  • Here are some of most important things to consider when making a PTE election:
  • When must the election be made?
  • Is the election binding or annual?
  • Is the election irrevocable?
  • How do you make the election?
  • Who is authorized to make the election on behalf of the PTE?
  • Are electing PTEs still required to comply with withholding or composite requirements?
  • Are nonresident members of electing PTEs still required to file returns?
  • What is the tax rate?
  • How is the electing PTE’s tax base calculated?
  • How do members of the electing PTE report their share of income?
  • Are net operating losses allowed, for the electing PTE or its members?
  • How do members of the electing PTE calculate their credit?
  • Can non-individual members take a credit? If so, is it refundable?
  • Are non-residents allowed to take an “other state tax credit” on their resident state income tax return for elective PTE taxes paid in another state?

The decision to make the election should be made on a case by case data. Each state website has great insights on how to make the elections.

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