Page 466 - TaxAdviser_2022

STATE & LOCAL TAXES
Editor:
Moshe Bell-Jacobs, J.D.
Author:
Eileen Reichenberg Sherr,
CPA, CGMA
Twenty-nine states
have enacted a
passthrough entity
tax as a possible
workaround to the
federal state and local
tax deduction cap.
26 September 2022
Questions to consider before
electing into a PTE tax
As many CPAs are aware, the $10,000 Kansas,* Louisiana, Maryland,
state and local tax deduction limitation Massachusetts, Michigan, Minnesota,
(SALT cap) for individuals was included Mississippi,* Missouri,* New Jersey,
in the federal law known as the Tax Cuts New Mexico,* New York, North Caroli-
and Jobs Act, P.L. 115-97, enacted at the na,* Ohio,* Oklahoma, Oregon,* Rhode
end of 2017. As a possible workaround Island, South Carolina, Utah,* Virginia,
to the SALT cap, states started to enact and Wisconsin. Additionally, New York
passthrough entity (PTE) taxes, with City* has also adopted a PTE tax. Those
Connecticut being the first state to do marked with an asterisk are effective in
so as a mandatory tax, after which other 2022 or later.
states started enacting PTE taxes as an Most states’ PTE taxes are effective
elective tax. beginning either in 2021 or 2022. Colo-
On Nov. 9, 2020, the IRS issued rado recently revised its PTE tax to be
Notice 2020-75, which clarified that retroactive to 2018. Pennsylvania
partnerships and S corporations may de-
(H.B. 1709) currently has a proposed
duct their SALT payments at the entity PTE tax bill. Iowa (H.F. 2087) and Ver-
level in computing their nonseparately mont (H. 527) also had proposed PTE
stated taxable income or loss. The notice
tax bills in 2022, but their sessions have
indicated that the IRS intended to pro- now ended without enacting them.
pose regulations to this effect, but as of There are nine states with no owner-
mid-2022 the Service has not issued any level personal income tax on PTE
further guidance. income: Alaska, Florida, Nevada, New
The owners of PTEs (partners, Hampshire, South Dakota, Tennessee,
shareholders, and LLC owners) gener- Texas, Washington, and Wyoming.
ally either may be allowed a state tax The 10 remaining states with an
credit for their share of the PTE tax or owner-level personal income tax on
may exclude their share of the PTE’s PTE income that have not yet proposed
income in computing their state in- or enacted PTE taxes are Delaware, Ha-
come tax. waii, Indiana, Kentucky, Maine, Mon-
Twenty-nine states have enacted tana, Nebraska, North Dakota, Vermont,
a PTE tax, including most recently and West Virginia.
Missouri, which, as of this writing, is Unfortunately, the states have taken
expected to sign one into law in the next differing approaches to their PTE taxes.
few weeks. The 29 states are Alabama, The rules vary based on many factors, PHOTO BY NIROSHAN86/ISTOCK
Arkansas,* Arizona,* California, Colo- such as eligibility, election method,
rado (retroactive to 2018), Connecticut frequency (annual or one-time), tax
(mandatory), Georgia,* Idaho, Illinois, base and rates, how and when to pay,
The Tax Adviser