Navigating pass-through entity (PTE) tax elections is essential for business owners and multi-state filers, especially with the One Big Beautiful Bill Act (OBBBA). While the expanded SALT deduction might seem to reduce the need for PTE elections, they still offer valuable tax planning opportunities.
Understanding how the OBBBA affects these elections will help you guide your clients toward smarter strategies.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: Do amounts that exceed a state tax liability count for estimated tax payments of pass-through entity tax (PTET) and carryover to a subsequent year?
A: In most cases they would, much like other tax credits, depending on the state. Credits in NJ, NY (state and NYC), CO, VA (and others) are refundable or effectively refundable; others are nonrefundable with carryforward. Always check the current year’s instructions.
Q: How is the PTET reported on Form 1120-S, U.S Income Tax Return for an S Corporation, or Form 1065, U.S. Return of Partnership Income, at the federal level?
A: On both returns, the tax is deducted on page one of the forms; for Form 1065, Line 14, Taxes and licenses, and for Form 1120-S, Line 12, Taxes and licenses. A state tax, paid like other business expenses, reduces net profit passing through to the shareholder or partner. The tax is not separately stated on Schedule K-1 for either entity.
Q: Is the PTET useful if a taxpayer is under Schedule A, Itemized Deductions, standard deduction threshold?
A: If filing standard or itemized deductions, the PTET will bypass Schedule A and be in the state account of the shareholder/partner whose entity paid the tax directly to the state, if that is how the state treats the tax. In that case, the benefit comes from a lower adjusted gross income (AGI) which is lower due to the greater expense to the entity.
Q: Do the estimates have to be made for all four quarters, or can they begin mid-year?
A: Typically, all four quarters should be paid in, but some states do provide relief if the PTET was recently enacted by the particular state. Check with the state’s website to find the latest information.
To learn more about PTE elections, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.