Pass-Through Entity Tax (PTET)
Authority: IRS Notice 2020-75
A pass-through entity tax is a state-level workaround to the federal cap on state and local tax deductions. Instead of the owners paying state income tax personally (where the SALT cap limits the federal deduction), the S corporation or partnership elects to pay the state tax at the entity level. The entity deducts that payment as a business expense, reducing the federal income that flows through to owners, and the owners receive a state credit or income exclusion so the same tax is not paid twice. The IRS blessed this structure in Notice 2020-75, and the large majority of states with an income tax have enacted a PTET regime. Elections are annual in most states, deadlines and estimated payment rules vary widely, and the math should be checked for owners in multiple states or with losses.
Example
A California S corporation with $1,000,000 of income elects PTET and pays $93,000 of state tax at the entity level. That $93,000 becomes a federal deduction, saving the owner roughly $34,000 of federal tax that the SALT cap would otherwise have disallowed, while California credits the payment against the owner's personal tax.
Related terms
SALT Cap
The SALT cap limits the itemized deduction for state and local taxes income, sales, and property taxes combined....
S Corporation
An S corporation is a corporation or an LLC that elects corporate treatment that has filed a valid election under...
Partnership
A partnership is a business with two or more owners that is taxed under Subchapter K of the Internal Revenue Code....
Stop looking terms up and start putting them to work.
Amadae runs your books, your quarterly estimates, and your tax strategy on autopilot, so concepts like this one turn into actual savings.
Book your free review