PTETs: A Clever Tax Workaround

It’s said that nothing is certain but death and taxes. To that you can add tax avoidance. As long as there have been taxes, there have been taxpayers looking for legal loopholes. The latest is the pass-through entity tax, which may benefit owners of such pass-through entities as partnerships and S corporations.

S corp concept - tax-efficient business structure for private corporations. Profits pass through to shareholders, taxed on personal income.

The logic is a little tortuous. Typically, the “pass-through” provision means the individual owners are taxed, not the entity as a whole. But as explained in The Journal of Accountancy, a professional publication, “A PTET is a state or other jurisdiction’s mandatory or elective entity-level income tax on partnerships and/or S corporations.” The JofA refers to official IRS publication Notice 2020-75, which says, “Any Specified Income Tax Payment made by a partnership or an S corporation is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation.”

In plain English, a PTET gives a tax break to the entity and allows shareholders/partners to—in practice—go over the $10,000 limit.

Does this sound complicated? It is. First, it is not available everywhere yet. Most states—but not all—have enacted some version, and they all differ slightly. New York City has even passed its own citywide PTET. Taking advantage of a PTET is not simply a matter of checking a box on a return. Even deciding if it’s worth it is complicated; it’s not always advantageous from a tax perspective.

There are still some unanswered questions about how PTETs work; the IRS will likely come out with additional guidance as the tax season progresses.

In short, if you’re a shareholder/partner in a pass-through entity, pick up your phone and call your tax adviser to see whether you’re eligible, whether it’s advantageous for you and how to go about it.

We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.


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