State Pass Through Entity Election – Is it right for your business?
In the four years since the TCJA put into law the $10,000 maximum State And Local Tax (SALT) deduction, many states have responded by creating pass-through entity (PTE) elections. These allow entities taxed as partnerships and S corporations the option of calculating and paying tax at the entity level (rather than having the tax borne only by the owners). Two years ago, the IRS announced support for this workaround to the SALT cap. This encouraged many more states to join the PTE crowd.
A PTE election allows the entity to become subject to the state’s tax (normally, it is only the owners that report the income and bear the tax). When the state tax is an entity-level obligation, the tax may become an entity business expense. The tax then reduces business income, rather than appearing as an owner’s itemized deduction. This avoids the $10,000 SALT cap, offering an unlimited deduction. But there can be varied implications, good and bad, especially when your entity has multiple owners.
As one might expect, as more than 20 states adopt PTE laws, each may operate a bit differently with confusion aplenty! Further, we anxiously await “Build Back Better Act” legislation from Washington which could lift the $10,000 SALT cap, and again tip the scales in your business’s PTE evaluation.
There are many elements to 2021 year-end planning, and a PTE election is just one of them. Your CLA State and Local Tax Team have done a wonderful job summarizing many of the considerations here:
Our CLA Construction Tax Professionals, in collaboration with CLA State and Local Tax Team, can work closely with you and your business to analyze the potential benefits of a PTE election.
Ben is a trusted professional advisor providing tax, accounting, assurance and consulting services to the construction industry. As a tax principal in the Minneapolis, MN office of CLA he helps construction company's and their owners navigate industry challenges and complex tax legislation. He gained experience with 2 regional firms and a sole proprietor for 19 years prior to rejoining CLA in 2016. Ben serves as National Construction Tax Leader for CLA and is a member of the CLA Construction Strategic Leadership Team.
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