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may fall short of fulfilling the owner’s be crucial for both accrual-basis and guidance regarding elections. While
total liability. cash-basis taxpayers to properly align legislative bodies are sometimes quick
Second, the costs associated with the deductions with credits received and to push through legislation in response
PTE election should be understood. It avoid potential Sec. 461 issues. to resident demands, taxing authori-
is likely the entity will need to adjust Owner concerns with ties of the same state will not move
its filing approach to consider how an implementation of a PTE election: at the same pace. Every practitioner
election will affect current nonresident Conversations regarding PTE elections who has dealt with PTE elections in
withholding and composite obliga- typically focus on the entity steps, but states such as California, New York,
tions in addition to its new PTE filing the implications to the owner group Maryland, or Michigan can speak to the
requirements. This will have a similar are just as important. Like the entity, timeliness of information over the past
effect for the owners, whose nonresident owners similarly may experience changes couple of years. The time allotted by
filing requirements may increase due in their filing process under a PTE those states for filing accurate elections,
to a PTE election. One of the largest election (especially in a nonresident forms, extensions, or payments on an
concerns for owners relates to their situation). For a taxpayer to benefit from enacted election in the recent past has
residency credit for taxes paid to another the PTE credit received, the taxpayer been merely a matter of days or weeks,
state. If a PTE election and subsequent may be required to file personally with not months.
credit were excluded from the residency the state to receive the benefit. This Future PTE election
credit calculation, the loss of the home will play a role in the owner’s resident considerations: To conclude on the
state credit could quickly outweigh the and nonresident filing requirements as topic of PTE elections, a practitioner’s
benefit of the federal deduction. they relate to estimated payments and job is not over with the filing of the
extensions, as the credits received will return. As states race to get in front
Step 2: Entity and owner have an impact on both filings. Also, of the SALT workaround for their
considerations PTE credits may play a role in the residents, amendments continue to filter
Governing body questions owner’s resident state by affecting the in that expand or broaden the scope of
concerning a PTE election: Once residency credit and personal estimated those who can receive the benefit. As
the PTE election opportunity is tax payments due to the state. of this writing, nearly half of the states
defined, the practitioner will need to that have created a PTE election are
determine which parties are responsible Step 3: Following through with undertaking various modifications to
for executing on the state election. elections better suit intended beneficiaries —
Generally, the entity’s operating Executing on PTE elections: their residents. This could mean a PTE
agreement should be reviewed to With the research and discussions election that made sense in the previous
ensure the current language is sufficient regarding PTE elections done, executing year may no longer make sense going
to support a PTE election. Areas of on the filings will be a timely last step. forward, and the irrevocable nature of
concern include, but are not limited to, Significant attention to state-by-state elections could significantly shift the
who has authority to make the election, details will be imperative in this area entity’s burden. Practitioners will need to
the kind of owner consent required for to ensure elections meet the necessary be on top of the moving pieces to make
making an election, and necessary steps due dates and that there are no regrets sure elections continue to make sense for
to maintain a taxpayer’s S corporation over a missed election. The process their clients, all while keeping an eye on
status, if applicable. for opting in to a state PTE election Washington to see what Congress has to
Entity concerns with varies. In some states it is as simple as a say about a SALT cap repeal.
implementation of a PTE election: check-the-box election. However, states From Patrick Walsh, CPA, M.Acc.,
In addition to new state tax filing require taxpayers to complete electronic Cleveland ■
requirements, entities will need to adjust filing procedures outside of practitioner
cash flow planning for the upcoming software. Several states require timely
expenses associated with PTE elections. estimated payments going forward to
Historically, entity distributions likely maintain valid elections. For example, in Editor
included state tax distributions for the California a missed estimated payment
benefit of the owners. Going forward, on June 15 could invalidate a future-year Anthony Bakale, CPA, is a tax
these funds will need to be held back to election. partner with Cohen & Company Ltd.
cover the entity’s liability. The timing It is also worth noting the pace in Cleveland.
of estimated payments to the state will at which taxing authorities release

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