The Pass-Through Entity Tax (PTE) was adopted in response to the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in 2017. Starting with tax year 2018, the law limits one’s federal income tax deduction of State and Local Taxes (SALT) to just $10,000. Previously there was no limit.
Residents in states such as California and New York were hit particularly hard because of their high state income tax rates. So, most high-income California taxpayers were paying SALT taxes far in excess of $10,000 per year.
PTE tax allows an entity taxed as a partnership or S Corporation to make a tax payment on behalf of its partners. The business pays an elective tax of 9.3% of qualified net income to the Franchise Tax Board.
Individual partners then receive a credit for state taxes paid on their individual state tax return for their pro-rata share. The biggest benefit is that the PTE payment is a business deduction at the entity level, thus making this state income tax payment deductible on the federal tax return.
This workaround is only in place for taxable years beginning on or after January 1, 2021, and before January 1, 2026.
Recently, we have found that many of our clients have either adopted the PTE tax and are using it effectively…or are not even familiar with it!
So, in the video below, Ryan and I:
- Answer the question, “What is California's Pass-Through Entity Tax?”
- Discuss some things to consider with the PTE.
- Offer an example of how using it can lower the overall amount of Federal taxes you pay.
As always, this is not tax advice - you should consult your tax professional to determine if this is right for you.
For more information: https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html
Happy planning,
Brian
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