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TAX CLINIC

can complicate a state PTE election, initiatives to avoid time constraints on
One of the largest whether they are the desired electing any PTE election. Factors that tend
to suggest a PTE election could be
entity or part of the electing entity’s
concerns for owners ownership group. A review of the own- beneficial include that the taxpayer
relates to their ership group will play an important role has high levels of taxable state income
residency credit for in the election process, as having certain largely sourced to PTE states, the
owner resides in a PTE state, and the
owner types will explicitly disqualify en-
taxes paid to another tities from participating in a PTE elec- owner’s home state includes PTE credits
state. tion. Additionally, each state’s election in its residency credits. New filing
requirements and owner ramifications
may depend on whether all owners are
included in the return or whether certain of a PTE election also should be
Colorado, Connecticut, Georgia, Idaho, nonqualifying owners may be excluded considered prior to electing in, as the
Illinois, Kansas, Louisiana, Maryland, from the PTE tax base. state impact of an election for some
Massachusetts, Michigan, Minnesota, Window of opportunity for a PTE owners could outweigh the benefit of
Mississippi, New Jersey, New Mexico, election: Currently, the SALT cap the federal deduction received.
New York, North Carolina, Oklahoma, is set to expire after 2025. Many state First, it is important to understand
Oregon, Rhode Island, South Carolina, elections follow a window of availability what the tax base is made up of and
Utah, Virginia, Wisconsin, and New that is tied to the existence of the SALT whether it is determined at the en-
York City (proposed in Iowa, Missouri, cap, and any increases to or repeal of the tity level or owner-by-owner level.
Ohio, and Pennsylvania). SALT cap may eliminate a state PTE Residency of the ownership group can
Does my entity qualify for a PTE election. Generally, state PTE elections dramatically affect the tax due, as some
election? Generally, partnerships and are completed on an annual basis and are states will tax resident owners on their
S corporations (and occasionally trusts) irrevocable once elected. total share of income as opposed to IMAGE BY JOSEPH SOHM; VISIONS OF AMERICA/GETTY IMAGES
are among the entity types able to make Estimating the benefit of a PTE their state-sourced income. Tax rates
such an election. However, many excep- election: To determine the potential for PTE elections may vary even when
tions can restrict eligibility. Publicly benefit of a PTE election, one must compared to the owners’ own personal
traded partnerships, multitiered struc- look beyond simply applying the PTE state income tax rates, so consideration
tures, single-member LLCs, disregarded rate against taxable income. The analysis may extend to what owner require-
entities, and sole proprietorships are requires a thorough evaluation of the ments are necessary in terms of person-
among a few examples of entities that entity’s performance, including future al estimated payments where the credit

24 August 2022 The Tax Adviser