Things Have Changed, Pass Through Entity Tax
By now you may have heard that many states have enacted state pass-through entity-level taxes (PTET). We discussed this in a previous blog State Pass Through Entity Election – Is it right for your business?
We would now like to explore the accounting treatment for this matter.
Accounting Considerations
FASB ASC Topic 740 provides guidance related to income taxes. Basically, income taxes attributable to pass-through entities are accounted for in accordance with ASC Topic 740 (taxes) and income taxes that are attributable to the owners of a pass-through entity are accounted for as a transaction with owners (distributions).
Entities need to consider several factors to determine whether a particular PTET is attributable to the entity (i.e., within the scope of ASC 740).
Some factors to consider related to reporting as tax or equity transaction are as follows:
Indicates Entity Attribution
- Owner is not required to file a tax return and/or permitted to claim payment of tax by entity against owner’s taxes
- Income of entity for which tax was paid by entity is excluded from owner’s income tax return
- Tax liability is not joint and severally liable by owners of the pass-through entity
- Laws and regulations indicate that the tax payment made is not on behalf of its owners.
- The tax base is determined without regard to the attributes of the pass-through entity owners
Indicates Owner Attribution
- Owner permitted to file tax return and claim payment of tax by entity as payment against owner’s income taxes
- Laws and regulations indicate that the tax payment made is on behalf of its owners
- Tax base is determined by the attributes of the pass-through entity owners
These are not the only factors to ponder, but they give you an idea of items to consider related to accounting for these matters. In certain states income tax assessments can be related to either the entity or its owner. In this case, accounting can be determined by a policy election selecting either reporting method. As Bob Dylan’s song, Things Have Changed goes, “Lotta water under the bridge, lotta other stuff too. Don’t get up gentlemen, I’m only passing through”. Some things have changed, and some are the same. These considerations can be complex, but you don’t have to walk this path alone, we are here to help.
Michael A. (Mike) Westervelt is a principal with CLA with over 25 years of experience and a past Chair of the AICPA’s PCPS Technical Issues Committee (“TIC”). Mike is a National Assurance Principal and Construction Industry Assurance Leader. Mike specializes in thought leadership, ethics, independence, financial reporting, client service and accounting consulting for U.S. and international clients. He has managed relationships nationally and internationally for entities in the construction, manufacturing, hospitality, commercial service and healthcare industries. Mike is also a member of the AICPA’s Accounting and Review Service Committee (ARSC) and volunteers as a mentor for American Corporate Partners (ACP). Mike graduated from Iona College with a Bachelor of Arts in Accounting. He is a Certified Public Accountant licensed by the states of North Carolina and New York. Mike lives in Charlotte, NC and enjoys spending time with his family and an avid member of F3 who’s credo is “Leave no man behind, but no man where you find him.”
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