When the Tax Cuts and Jobs Act (TJCA) was enacted in 2017, it limited the amount of state and local taxes (SALT) that individuals can deduct for federal income tax purposes to $10,000 (or $5,000 for a married individual filing separately). This “SALT cap” has brought on a flurry of legislative action as states enact Pass-Through Entity (PTE) tax elections that allow owners of PTEs such as S-Corporations and Partnerships to bypass the SALT cap by allowing their share of taxes to be paid by the entity at the entity level, and therefore lowering the owner’s federal income tax liability.
In November 2020, the IRS indicated its intention to propose regulations clarifying that a partnership or an S-Corporation could deduct state and local income taxes imposed on its net income for the tax year at issue without regard to the SALT deduction limitation. Those regulations have yet to be proposed. It was widely anticipated that most states would rush to enact an entity-level tax to provide the federal tax benefit to owners of PTEs in their states.
On September 30, 2021, the Massachusetts legislature overrode the Governor’s veto, adding Massachusetts to the growing list of states to enact PTE tax legislation as a SALT cap workaround.
Currently, 17 states have enacted PTE tax election legislation: Alabama, Arizona, California, Colorado, Georgia, Idaho, New Jersey, Louisiana, Maryland, Massachusetts, Minnesota, New York, Oklahoma, Oregon, Rhode Island, South Carolina and Wisconsin.
Below we have provided a high-level summary of PTE tax legislation in several states that may be of interest to our clients:
|
State |
Eligible Entities |
Tax Rate |
Effective Date |
Tax Credit |
Election |
|
California |
S Corps and Partnerships |
9.3% |
Tax years beginning after January 1, 2021, and through tax years before January 1, 2026 |
Owners are eligible to claim a credit that is equal to the tax that the PTE pays. If the credit exceeds the net tax reported on the owner’s return, the excess will be carried forward to reduce tax in the following year, for up to five years. |
The election is irrevocable and must be made annually on the originally and timely filed tax return in the form and manner as prescribed by the California Franchise Tax Board (FTB). |
|
Massachusetts |
S Corps, Partnerships, LLCs |
5% |
Tax years beginning after January 1, 2021 |
Equals the owner’s proportionate share of tax liability x 90% |
Irrevocable and must be made annually |
|
New York |
Partnerships, LLCs treated as Partnerships, and S-Corps
|
Imposed at a graduated rate from 6.85% on the first $2 million of taxable income, up to a maximum of 10.9% on taxable income in excess of $25 million |
Tax years beginning after January 1, 2021 |
Direct partners, members, or shareholders (S-corporations) will be allowed a personal income tax credit for their proportionate share of the PTE tax paid by the entity. If the credit exceeds the personal income tax due for the applicable year, the excess will be treated as a refund
|
PTEs must make an annual, irrevocable election by the due date of the first estimated quarterly payment (March 15th of each year), to opt into the PTE tax. However, for 2021 only, the opt-in deadline has been extended to October 15, 2021 |
If you have questions about the PTE tax legislation passed by these and other states, leave a comment below or feel free to contact me directly, I’m happy to help.
