Should Your Business Elect to Pay Pass-Through Entity Taxes?

With most states now offering entity level PTE taxes as a workaround for federal limits on deductions for state and local tax (SALT) payments for individuals, it’s a good time to review whether you should take advantage of this opportunity to lower your taxes.

The PTE (Pass-Through Entity) tax provision offers a beneficial strategy for business owners of entities like LLCs, partnerships, and S Corporations. It enables a reduction in the federal income tax burden by allowing the pass-through entity to make an election. Through this election, the entity pays and deducts state income taxes at the entity level. The taxable income passed on to individual owners is now lowered. This reduction effectively permits a federal deduction for the state income taxes linked to the company’s profit. This approach bypasses the $10,000 limitation set for deducting state and local taxes on the individual owners’ tax returns. In essence, the PTE tax provision provides a means for business owners to optimize their tax situation and potentially decrease their overall tax liability.

Nearly three dozen states have enacted a version of the PTE tax. That’s good news for eligible business owners whose state tax on business income exceeds $10,000 or who have hit the federal deduction cap by deducting local property taxes, withholding taxes, or other state and local taxes.

Requirements for Your Business to Make the PTE Election

The rules vary from state to state, which means owners of businesses with multistate tax obligations will have to sort out the different rates and criteria to determine what is in their best interests.

It may not be in your best interest to file for the PTE election in every state in which you do business. In some states, PTE taxes may apply at a higher rate than the individual owners may otherwise pay. You will also need to consider whether your resident state allows credit for PTE taxes paid to other states to ensure the business income is not subject to double taxation at the state level.

Ohio’s PTE was first in effect for the 2022 tax year. The state passed additional legislation in 2023 to make the PTE more taxpayer friendly.

Kentucky and Indiana enacted elective PTE taxes in 2023, with provisions to make it retroactive to 2022.

Help with PTE Tax Decisions for Your Business

Solid tax strategies are the product of experience, reliable financial information, and careful planning. At Kirsch CPA Group, we partner with growth-minded entrepreneurs to provide holistic accounting, tax planning, and business advisory services aligned with your short and long-term goals.

To learn more about how PTE taxes could benefit you or your business, contact us at (513) 858-6040 or reach out to any member of your Kirsch CPA Group client service team.

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