Side Step the $10,000 Salt Limit with the PTE Loophole

TLDR: The $10,000 limit on deducting state and local taxes is avoidable. Maybe.

To date, 29 states have enacted pass-through entity (PTE) taxes that can enable owners of pass-through entities such as partnerships, multi-member LLCs, and S corporations to effectively get around the federal $10,000 limit on deducting state and local taxes (SALT).

The 29 states are Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, and Wisconsin. PTE tax legislation is pending in Iowa, Pennsylvania, and Vermont.

If your pass-through business is located in one of these states, you may be able to save thousands of dollars in federal income taxes by electing to have your PTE pay the state tax due on its income at the entity level instead of you paying your share of such taxes on your personal return. Reason: When your PTE pays such taxes, it may deduct them in full because it is not subject to the individual $10,000 SALT limit.

Unfortunately, every state’s PTE tax regime is different. Before your PTE makes a PTE tax election, all its owners must understand the issues involved. These include:

• Is your PTE eligible for a PTE tax election?

• What percentage of ownership is required to make the election?

• What’s the deadline for the election?

• Are estimated PTE taxes due?

• How much is the PTE tax?

• Does your state give electing PTE owners a tax credit or income exclusion?

• How are non-resident PTE owners treated?

Much to discuss on this topic. If you own a business & a home and are sick of getting capped on your state and local tax deductions, please schedule time with one of our accountants.

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