State pass-through entity taxes (PTET) have swept the nation and are now the rule, not the exception.
Such taxes enable owners of pass-through businesses to legally avoid the $10,000 annual limit on state and local taxes (SALT).
Key point. Adopting a PTET regime costs states nothing and benefits pass-through business owners.
How It Works
The idea behind the PTET is simple: A pass-through entity (PTE), such as a multi-member LLC, partnership, or S corporation, elects to pay the state income tax due on the PTE’s business income that would otherwise have passed through the PTE and been paid by the PTE’s owners on their personal tax returns.
The PTE then claims a federal business expense deduction for the state income tax payments.
The PTE’s deduction for state income taxes is not subject to the $10,000 SALT limit because the limit does not apply to taxes imposed at the business-entity level. Depending on the state, the PTE owners then either
1.
take a state-income-tax credit for the tax paid by the PTE, or
2.
reduce their taxable income for state purposes by their share of the PTET.
Either way, the PTE owners effectively benefit from a federal deduction for all the state income tax due on their pass-through income, even if it is far more than the $10,000 ... Log in to view full article.
