The pass-through entity tax (PTET) is an optional state entity-level tax that some pass-through entities may elect to use. Many tax pros have clients in states where this is an option or may be considering working with clients in these states.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: If the entity pays the shareholder tax and takes the deduction at the entity level, this lowers the taxable income flow through on the federal return. Then the state taxable income would not allow the deduction but allow the credit, correct? The amount paid for each shareholder/partner reduces the basis of each appropriately at the entity level, correct?
A: You would need to see how the state handles the PTET. Generally, the state will not allow the deduction for a state tax. The instructor does not address the impact of basis in the webinar. However, you are correct; the payment reduces income at the federal level so the income is less. Hence, basis would ultimately be impacted since the ordinary income is less.

Q: Do I understand correctly that electing PTET will only help taxpayers who file Schedule A?
A: No, if the taxpayer (shareholder/partner) does not itemize, you could use the election as a credit to offset the state personal income tax. It’s a payment made by the entity on behalf of the shareholder/partner.

Q: So if the PTET is not used on Schedule A, it would go towards the shareholder’s estimated payment, correct?
A: The entity is making the payment on behalf of the shareholder so, yes, it’s a payment on the state return.

To learn more about the tax implications of pass-through entity taxes, 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 at natptax.com/explore.