Steven N.J. Wlodychak is the former indirect (state and local) tax policy leader for EY’s Americas Tax Policy and a retired principal in EY’s National Tax Department in Washington, D.C.
In this installment of The Hissing Goose, Wlodychak looks at recent state passthrough entity tax legislation.
Last August in these pages, we published an article, summary tables, and a map describing some of the key provisions of the various passthrough entity (PTE) taxes, both elective and mandatory, enacted by the states in response to the $10,000 limitation on the federal state and local tax deduction set out in IRC section 164(b)(6) (the SALT cap).1 Since then, three more states have enacted a PTE tax regime (that is, Massachusetts, Michigan, and North Carolina), and many states — both with and without a PTE tax — have issued regulations, guidance, and forms that taxpayers and their advisers will find very useful (and perhaps in some cases a bit disappointing and complex) as they consider whether to make a state PTE tax election and, if making the election, how to do it. As the title of the first article suggested, these state PTE tax laws vary widely, and with all the administrative guidance being issued, now seemed like a great time to provide another update.
For those of you reading this article who were scurrying to find something to help with 2021 year-end planning and payment purposes, I sincerely apologize for not finishing this update sooner! As you probably experienced, a great deal of the state guidance was released in December, and it wasn’t possible to publish this compendium before then. Also, for those of you familiar with the tables in the August article, please know that I added a fourth table assembling all the laws, regulations, and guidance into one table, and then reassembled the tables.
So, without any further ado, let’s jump into this latest update on state PTE taxes.
Federal Regulations and Legislative Action
First, an update on the status of the federal tax laws and guidance that started all this state activity. When it issued Notice 2020-752 shortly after the federal elections in November 2020, effectively blessing state PTE taxes as a workaround for the SALT cap, the IRS promised it would issue regulations providing more guidance than in the notice. So far, there’s been no word on when (or even if) the IRS will issue any regulations. As Lee Sheppard suggested in these pages a few weeks ago, the IRS doesn’t have unlimited resources, may not have the multidisciplinary capability to draft such regulations, and has many other pressing regulatory projects to address.3 It doesn’t seem like a high priority for the IRS to put in the effort to develop guidance for a federal tax provision that by its current terms is supposed to expire on December 31, 2025 (and might even be changed).
Ironically, and seemingly supportive of the view that it doesn’t make much sense to work on regulations when the statute might change, congressional House members, primarily from the Northeast, have proposed either eliminating the SALT cap entirely or substantially increasing the threshold from $10,000 to $80,000. In fact, they were successful in inserting the threshold expansion provision as an amendment to the House version of the Build Back Better Act,4 which has been delayed in the Senate since the holidays. Whether the SALT cap expansion continues to be included in any version of the Build Back Better Act remains to be seen.
Finally, Connecticut, Maryland, New Jersey, and New York have petitioned the U.S. Supreme Court to overturn lower court rulings dismissing their challenge to the constitutionality of the SALT cap.5
In the meantime, with all this federal action surrounding the SALT cap, the states continue to rapidly proceed with enacting and implementing their versions of the PTE taxes to enable taxpayers to “work around” the federal limitations.
Electronic Elections, Filing, Payment, and Reporting Required
Several states require that all transactions involving PTE taxes — including not only the payment of the tax but also the filing of elections, returns, and other related information — be submitted electronically. For example, in Massachusetts, while the election itself is made on the “regular” return filed by the PTE, the PTE tax election must be confirmed electronically on a newly created Form 63D-ELT.6 Perfecting a PTE tax election in Oklahoma is even more complicated. Perhaps motivated by the children’s game “Simon Says,” the Oklahoma Tax Commission instructs a PTE to first file a special form to make the PTE tax election.7 Then, the PTE must await receipt of an acknowledgment letter from the commission accepting the application. That letter is critical because first, it must be attached to the PTE’s annual tax return, on which it must “check off” a special PTE tax election box, and then must also provide a copy to every one of its owners, who must likewise attach the copy of the letter to their own personal income tax returns in order to claim the offsetting tax credit for their share of the Oklahoma PTE tax paid.
This, in addition to preparing a specialized Oklahoma-specific Form K-1 delineating the computations of the PTE tax applicable to each owner. Sounds like a lot of paper (or, in the e-commerce age, bits and bytes!). Certainly, Oklahoma isn’t alone here: States generally require PTEs to provide their owners with notice that a PTE election has been made. That notice is usually provided through a check box on the appropriate state’s K-1 provided to the owners, which also must contain PTE tax information relevant to each owner.8 Pleasantly, at the other extreme and demonstrating the utmost simplicity, the Michigan Department of Treasury advised that a payment of that state’s PTE tax through its online system (Michigan Treasury Online) is all that’s necessary to make a valid PTE tax election in that state.9 (The PTE must, however, still provide the requisite PTE tax information both to the tax authority and to each owner.)
Most state guidance makes clear what many practitioners likely had previously concluded: Sole proprietors or single-member limited liability companies that are treated as disregarded entities (DREs) for federal income tax purposes are not eligible to make a state PTE tax election.10 Likewise, states differ on whether single-member LLCs that are treated as DREs can be eligible members of a PTE electing into the state’s PTE tax regime, although most of the guidance seems to suggest that if the DRE’s owner is eligible to join in the PTE tax election directly, the insertion of the DRE won’t disqualify the PTE from making a PTE tax election. Regardless, PTEs and their tax advisers should carefully assess each state’s PTE tax qualification rules, because they do seem to vary in very important ways from state to state.
Documentation Requirements
Generally, the election must be made on the regular return that the entity files with the state for the tax year for which the taxpayer wants the PTE election to apply.11 Some states require the submission of additional documentation. Massachusetts, for example, also requires a separate electronic confirmation of the election in addition to the actual making of the election on the entity’s tax return.12
Compared with other states, Louisiana requires a lot more additional documentation, including:
documentary proof of the requisite “more than 50 percent ownership” approval of the election by the PTE’s owners;
a list of all the PTE’s owners and their tax identification numbers, and the federal income tax returns of the entity for the preceding three tax years (including the Forms K-1);
a copy of the S corporation election form, if applicable;
formation documents of the entity (for example, articles of incorporation or partnership or LLC operating agreement);
a list of the entity’s unused Louisiana net operating losses, tax credit balances, and other tax items earned at the entity level before the election; and
audit reports from the entity’s accountants for the preceding three tax years, if applicable.13
Also, each year an electing PTE must attach to its Louisiana return a pro forma federal Form 1120 completed as if it had filed a C corporation federal income tax return.14
What’s Included in the PTE Tax Base?
Some state PTE tax laws differentiate between the distributive shares paid to residents and those paid to nonresidents in computing both the PTE tax base and the PTE tax credits due to the members themselves. Most states allow resident members to claim PTE tax on 100 percent of their distributive share of PTE income while nonresident members can claim PTE tax only on their apportioned share of income “sourced” to the jurisdiction.15 New Jersey in its original enactment apparently didn’t, but a bill enacted in mid-January 2022 amended the state’s existing PTE tax law so it now follows the rules in other states and expands the PTE tax base for New Jersey residents so that 100 percent of a resident partner’s share of distributive PTE income would be included in the New Jersey PTE tax base.16
Adding some complexity to its PTE tax, New York differentiates between the amount of the distributive share of resident income that can be included in the PTE tax base between that of partnerships with that of S corporations. While the PTE tax base for a partnership includes 100 percent of the income allocated to resident partners, the same base for resident shareholders of an S corporation is limited to the amount apportioned or allocated at the S corporation level. In other words, resident partners can achieve a 100 percent deduction from New York without regard to the federal SALT cap, while a resident S corporation shareholder is limited to the amount apportioned to New York. I’ve heard from my sources in New York that this was deliberate for fear that providing resident shareholders of a New York S corporation with a conceivably larger credit than that provided to nonresident shareholders would theoretically result in the creation of different classes of stock, violating the federal tax law requirement that S corporations have only one class of stock.17 New York isn’t alone here; several other states provide for the equal treatment of resident and nonresident shareholders of S corporations in their PTE taxes.
Guaranteed Payments — Part of PTE Tax Base or Not?
Most states provide that guaranteed payments are includable in the PTE tax base and thus are subject to the PTE elective tax.18 The California Franchise Tax Board, on the other hand, concluded that guaranteed payments are not considered part of a PTE’s qualified net income since they are not part of the distributive share of the PTE’s income for purposes of the PTE elective tax as prescribed by the state’s statute.19 Still other states make that distinction based upon the nature of the guaranteed payments. The Georgia Department of Revenue by regulation explains that guaranteed payments made to retired owners of an electing PTE that are treated as “retirement income” and can be taxed only by a retiree’s state of residence in the year of payment because of other limitations of federal law must be subtracted by the PTE in computing its Georgia PTE taxable income.20 Obviously, the gating question is whether the PTE’s pension payment to the retired owner qualified for such special treatment under the federal law (as retirement income, for example).21 Moreover, the Georgia department’s recognition of the supremacy of the federal law over the applicable state law probably should serve as a warning to other states that they ought to address the application of the federal rule to their PTE tax regime, too (and maybe the IRS ought to issue some guidance that this really isn’t a problem).
Special Tax Benefits
In some cases, electing into a state’s PTE tax regime might mean the owners lose some state tax benefits they might otherwise have qualified for had the election not been made. In some states, the PTE cannot deduct most charitable contributions in computing its PTE taxable income.22 On the other hand, in Wisconsin, a PTE and its owners can claim the 30 percent and 60 percent long-term capital gains exclusions just as the owners could on their individual returns, meaning that individual owners continue to benefit from those unique Wisconsin provisions regardless of whether the PTE elects into that state’s PTE tax.23
The South Carolina tax regime is a little quirky in that even before enactment of the SALT cap, the state provided an elective, reduced 3 percent tax rate for “active trade or business income,” compared with the “standard” rate of 7 percent.24 The new South Carolina PTE regime “turbo charged” the benefit by merely allowing an election to assign the taxability of the income subject to the 3 percent rate from the individual owner to the PTE for the purpose of allowing the owners to also qualify for the exclusion from the federal SALT cap. Because of this distinction, PTEs and their owners can’t really claim a complete federal tax benefit for their PTE income but must undertake an additional analysis of the PTE income for purely South Carolina tax purposes. Electing South Carolina PTEs thus have to divide their income between “active trade or business” income eligible both for the reduced 3 percent tax rate and the elective PTE tax and other income (such as income derived from the provision of services and passive income that accrues to the PTE itself that is not eligible for the reduced rate) which is excluded from the PTE tax base and, consequently, appears to be ineligible for exclusion from the federal SALT cap as well.25
Estimated Payments
As one would expect, most states require electing PTEs to pay estimated taxes just like any other taxpayer, and most tie the PTE tax to the state’s existing estimated tax payment rules. Also, as one would expect, the threshold amounts and the percentage amounts that have to be used to determine the amount of each periodic estimate differ from state to state, and even within a state, based upon the nature of the taxpayer (that is, fishermen and farmers apparently qualify for more lenient estimating purposes than other taxpayers (just as they do for federal income tax purposes)) and whether the taxpayer has a complete year or short year. Alabama, for example, requires a PTE to pay estimated taxes only if the PTE tax will exceed $500. In New York, that threshold is $600. In Georgia, it depends upon whether the PTE has $25,000 or more of Georgia taxable income. Most states require estimated PTE taxes to be paid even before the PTE tax election is made, creating an existential “chicken or the egg” problem, and with it, a whole host of refund (or, more accurately, “overpayment”) issues in the event that the PTE and its owners make the PTE tax estimated payments and later choose not to go through with the election for the given year.
Fortunately, in most cases, the dates on which the estimated taxes must be paid generally follow the dates that would have otherwise corresponded to the estimated tax payment schedule the PTE and its owners would have used if it hadn’t elected into the PTE tax regime. New York is an interesting exception, probably because of a drafting oversight in the PTE tax statute. Under New York’s PTE tax law, the PTE estimated taxes are due on statutorily specified calendar-year quarters, regardless of the fiscal-year quarters of the PTE (or, for that matter, those of its owners).26
Just as if they were filing returns without a PTE tax election, most states require four quarterly estimated payments during the year by an electing PTE corresponding to the schedule they otherwise would have paid under “normal” PTE withholding rules. California, however, only requires an electing PTE to make two payments during the year: the first due no later than June 15 and in an amount not less than $1,000 (but at least 50 percent of the annual estimate), with the remainder due with the final payment at the end of the tax year.27
No state enacting a PTE tax allows owners a credit for previously paid estimated tax payments they might have made against their share of the elective PTE tax liability28 (although all appear to allow for owners in future years to calculate their own estimated payments for personal income tax purposes, taking into account their share of the credits they will receive for PTE taxes paid at the entity level). Also, most states do not allow PTEs that later choose not to make the PTE tax election (or revoke a previously made election during the tax year) to credit any of the estimated tax payments to other taxes (although such estimated taxes can be refunded to the PTE provided the appropriate procedures are followed).29
Composite Returns
One area of complexity for nonresident members is whether they can claim a credit for the PTE tax paid to the state if they have historically joined in a composite return. The advantage to nonresident taxpayers of joining in a composite return, of course, is administrative simplicity: Instead of filing individual returns in every state in which the PTE does business, the PTE can file a single collective return for all its individual owners. Unfortunately, the states are not consistent in their approaches. Massachusetts and New Jersey, through their guidance, state that a nonresident joining in a composite return is likewise eligible for their respective share of the PTE tax credit and such PTE tax credit can be included in the calculation of each state’s respective composite return for those PTE owners joining in such a return.30 Alabama and New York, on the other hand, require that a PTE owner file their own individual return if they want to claim their share of the credit for PTE taxes paid to the state. Maryland prohibits a PTE electing into its elective PTE tax from filing a composite return. Thus, a nonresident in these states cannot join in a composite return and receive a PTE tax credit.
States ought to rethink these requirements to reduce the complexity (and mass of paper (oh, alright, bits and bytes!)) that will need to be filed for nonresidents who otherwise would qualify for a composite return.
Other State or Resident Tax Credits — Naughty and Nice Lists
The tax authorities in New York and Illinois both published a list of states with “substantially similar” PTE taxes to theirs as mandated by the state PTE statute for purposes of their resident or other state tax credit.31 These lists are important so that resident taxpayers know that making a PTE election in another state won’t result in a denial of the resident state tax credit because the taxes were paid at the entity level, resulting in potential double taxation and effectively a dollar-for-dollar increase in overall state tax liability.
Pleasantly, the lists in these two states include the “usual suspects” (that is, each of the states that enacted a new PTE tax since 2018). On the other hand, the two states’ lists differ in one tiny, almost insignificant, respect: New York inexplicably includes Ohio on its “nice” list, but Illinois doesn’t. That seems a little odd, because the last time I checked, Ohio hadn’t enacted a new PTE tax (although a bill is pending to do so32). Instead, Ohio has long had a PTE tax that acts as a composite return to assure the collection of state personal income taxes from nonresident owners. Which leads to yet another question: If Ohio is on New York’s nice list, why is Virginia, by its exclusion, on its “naughty” list? Like Ohio, Virginia has long had a PTE tax applicable to the distributable share of income paid to nonresident owners nearly identical to Ohio’s (and for that matter, neighboring Maryland’s (which among these three states is the only one that has actually expanded its PTE tax to provide a PTE tax election for its own residents)). Similarly, why did New York think it could include Ohio on its list, but Illinois didn’t? For that matter, why do the New Hampshire, Tennessee, and Texas taxes, by their exclusion, belong on either state’s naughty list since these state taxes apply to partnerships and S corporations, too? I recognize that these three states don’t impose a general personal income tax, but I for one don’t understand the rationale for the discrimination that only hurts their residents who might be doing business in the other states. I know I’ve said this before, but it sure is worth repeating, and I hope this discriminatory treatment provokes a reexamination by all states of their resident or other state tax credits.
Adverse Guidance From States That Didn’t Enact a New PTE Tax
As I mentioned in an earlier article,33 the Maine Board of Tax Appeals ruled that a resident of that state (which hasn’t yet enacted an elective PTE tax) wasn’t entitled to a credit for his share of the Connecticut PTE tax paid by an LLC he owned, resulting effectively in a double state tax on the same income.34 Sadly, Maine is no longer alone: The Virginia Department of Taxation (Va. DOT)35 and the Indiana DOR36 have each concluded that residents of their states can’t claim a resident credit for the PTE taxes paid to other states (although the Va. DOT found that the commonwealth’s resident credit statute37 allows the credit for S corporation shareholders for the income taxes paid to other states at the entity level but not for owners of partnerships38). My point isn’t to quibble with the scrupulous analysis by these administrators of their state statutes in these three rulings, but one would hope that the tax administrators’ actions provoke the legislators in these states to recognize that such rulings only hurt their residents (who are also voters), causing them to quickly amend the resident credit statutes to avoid the potential of a double tax on their residents’ income from PTEs engaged in multistate activities.
New State PTE Tax Legislation
As mentioned above, in October 2021 Ohio legislators introduced a bill to provide Ohio residents with a PTE tax election similar to those enacted in other states by expanding coverage of the state’s existing PTE tax to them.39 Likewise, elective PTE tax bills have been introduced in early January 2022 in Iowa,40 New Mexico,41 Vermont,42 and Virginia43 (which is separate from the commonwealth’s existing PTE tax that acts as a withholding tax on the distributive share of PTE income to nonresidents44). No action has been taken on Pennsylvania’s PTE tax proposal since it was introduced in June 2021.45
Conclusion
The states continue to provide PTE owners with relief from the federal SALT cap by enacting and promoting these elective PTE taxes at a rapid pace, as well as issuing useful guidance. Nevertheless, the compliance burdens for PTEs and their owners continue to be daunting, confusing, and complex, particularly for those engaged in multistate activities. PTEs, their owners, and their tax advisers must navigate an ever-changing, multilevel chessboard of choices based on purported changes to federal tax law, the states in which the PTEs and their owners do business, the character of each owner of the PTE, and even the nature of the PTE’s income, among other variables. One would hope that as state tax administrators gain more experience with these newly devised taxes and compare these experiences among themselves, they will identify best practices, simplify the processes, and eliminate unnecessary administrative burdens. In the meantime, taxpayers and their tax advisers should carefully follow the developments in every state during this incredibly dynamic area of state and local tax law.
State | Enactment Date | Session Law Citation | Key Statutory Codification | Regulations | Guidance | Forms | |
|---|---|---|---|---|---|---|---|
Alabama | Feb. 11, 2021. | 2021 Ala. Acts 1, section 10 (2021 Ala. H.B. 170), amended by 2021 Ala. Acts 423 (2021 Ala. H.B. 588). | Not yet codified. | None. | Ala. DOR, Electing Pass-Through Entities: Updated Temporary Guidance for Electing Pass-Through Entities Under Acts 2021-1 and 2021-423 (updated June 14, 2021); NOTICE Alabama Electing Pass-Through Entity Tax Act Guidance (Oct. 19, 2021). | Form PTE-E (expected to be available in Jan. 2022). | |
Arizona | July 9, 2021. | 2021 Ariz. Sess. Laws ch. 425, 2021 Ariz. H.B. 2838 (Senate engrossed version) (May 26, 2021). | Ariz. Rev. Stat. sections 43-1014, 43-1075. | None. | None. | Not released. | |
Arkansas | Mar. 15, 2021. | 2021 Ark. Acts 362 (2021 Ark. H.B. 1209). | Ark. Code Ann. sections 26-65-101 to -108 (new chapter 65). | None. | None. | Not released. | |
California | July 16, 2021. | 2021 Cal. Stat. ch. 82 (2021 Cal. A.B. 150), section 15 (Small Business Relief Act). | Cal. Rev. & Tax Code sections 19900-19906, 17052.10, 17055. | None. | Franchise Tax Board Pass-through entity (PTE) elective tax webpage (last updated Dec. 21, 2021); Help with pass-through entity elective tax: Frequently asked questions webpage (last updated Dec. 23, 2021). | Cal. Form FTB 3893, “2021 Pass-Through Entity Elective Tax Payment Voucher”; Form FTB 3804, “Pass-Through Entity Elective Tax Calculation” (unavailable); Form FTB 3804-CR, “Pass-Through Entity Elective Tax Credit” (unavailable). | |
Colorado | June 23, 2021. | 2021 Colo. Sess. Laws ch. 300 (2021 Colo. H.B. 21-1327). | Colo. Rev. Stat. sections 39-22-340 to -346. | None. | None. | Not released. | |
Connecticut | May 31, 2018. | 2018 Conn. Pub. Acts 18-49, section 1; 2019 Conn. Pub. Acts 19-117, section 333; 2019 Conn. Pub. Acts 19-186, section 1. | Conn. Gen. Stat. sections 12-699 to -699a. | None. | Conn. Dept. of Rev. Serv. Pass-Through Entity Tax; OCG-6 Regarding the Calculation of the Pass-Through Entity Tax (last updated Aug. 16, 2019); OCG-7 Regarding the Pass-Through Entity Tax Credit (last updated Aug. 16, 2019). | Form CT-1065/CT-1120SI, “Connecticut Pass-Through Entity Tax Return” (other forms available at Conn. Dept. of Rev. Services website). | |
District of Columbia | Preceded enactment of Tax Cuts and Jobs Act. | Not relevant. | UBT — D.C. Code sections 47-1808.01 to -1808.15; S corporation — D.C. Code sections 47-1807.01 to 1807.15 (S corporation treated as C corporation). | NA | NA | NA | |
Georgia | May 4, 2021. | 2021 Ga. Acts ch. 164 (2021 Ga. H.B. 149). | Ga. Code Ann. sections 48-7-21(b)(7)(C) (S corporations), 48-7-23 (partnerships). | Ga. Comp. R. & Regs. 560-7-3-.03 (election to pay tax at the PTE level). | None. | Not released. | |
Idaho | Apr. 15, 2021. | 2021 Idaho Sess. Laws, ch. 239 (2021 Idaho H. 317) (enrolled). | Idaho Code section 63-3026B. | None. | Idaho State Tax Comm’n, More SALT guidance (updated Dec. 20, 2021); Updated: SALT workaround payment due Dec. 31, 2021 (posted Dec. 15, 2021). | Not released. | |
Illinois | Aug. 27, 2021. | Ill. Pub. Act 102-658 (2021 Ill. S.B. 2531). | 35 Ill. Comp. Stat. 5/201(p). | None. | Ill. DOR, Pass-Through Entity Information (Publication 129); What Is the Pass-Through Entity (PTE) Tax? | Not released. | |
Iowa (proposed) | Proposed. | Iowa Code sections 422.16C | NA | NA | NA | ||
Louisiana | June 22, 2019. | 2019 La. Acts 442; see also La. DOR RIB 19-019, “Guidance on the Pass-through Entity Election” (2020). | La. Rev. Stat. sections 287.732, 287.732.2, 293, and 297.14. | La. Admin. Code tit. 61:I, section 1001, Election of Pass-Through Entities (adopted Jan. 20, 2020). | La. DOR, Rev. Info. Bull. No. 19-019 Guidance on the Pass-Through Entity Election (Feb. 5, 2020). | La. DOR, FormR-6980, “Tax Election for Pass-Through Entities (2/20)”; Form R-6981, “Statement of Owner’s Share of Entity Level Tax Items” (Feb. 2021); Form R-6982, “Schedule of Tax Paid if Paid by Owner (2/20).” | |
Maryland | May 8, 2020. | Md. Code Ann., Tax – Gen. sections 10-102.1, 10-402, 10-701.1, and 10-703. | None. | Md. Comptroller, Admin. Rel. No. 6, Taxation of Pass-through Entities; Frequently Asked Questions on the Maryland Pass-Through Entity Tax (Dec. 27, 2021). | Md. Comptroller, Form 511, “Pass-Through Entity Election Income Tax Return.” | ||
Massachusetts | Sept. 30, 2021 (legislative override of governor’s veto). | 2021 Mass. Acts, ch. 69 (2021 Mass. H.B. 4009). | Mass. Gen. Laws ch. 63D, sections 1 to 7. | None. | Mass. DOR — Working Draft TIR — Pass-Through Excise (Dec. 30, 2021); Elective pass-through entity excise webpage (updated as of Jan. 4, 2021); Tax Directive 19-1, Application of the Massachusetts Personal Income Tax Credit for Taxes Paid to Another Jurisdiction to the Connecticut Pass-Through Entity Tax. (Sept. 19, 2019). | Mass. DOR, Form 63D-ELT, “Entity Level Tax”(draft as of Nov. 12, 2021). Must be filed electronically. | |
Michigan | Dec. 20, 2021. | 2021 Mich. Pub. Acts 135 (2021 Mich. H.B. 5376 (Enrolled Dec. 14, 2021)). | Mich. Comp. Laws sections 206.801 to 206.819 and 206.831-847 (also known as “Part 4”). | None. | Mich. Dept. of Treas., Notice: Instructions for Electing Into and Paying the Flow-Through Entity Tax (Dec. 22, 2021). (Mich. Dept. of Treas. also indicated additional advice will be forthcoming in Jan. 2022.) | Not released. | |
Minnesota | July 1, 2021. | 2021 Minn. H.F. 9, article 3 (2nd Engrossment). | Minn. Stat. section 289A.08, subdiv. 7a. | None. | Minn. DOR, Law Change FAQs for Tax Year 2021: Pass-Through Entity Tax (last updated Jan. 7, 2022). | Minn. DOR, 2021 Schedule PTE, Pass-Through Entity Tax. | |
New Jersey | Jan. 13, 2020. | N.J. P.L. 2019, c. 320; N.J. P.L. 2021, c. 419 (2021 N.J. A6110 (updated Jan. 1, 2022), 2021 N.J. S.4068 (updated Nov. 8, 2021). (amends N.J. PTE tax to allow electing partnership to include 100% of distributive share of income to N.J. residents to be used to compute elective PTE tax). | N.J. Stat. Ann section 54A:12-1 et al. | None. | N.J. Div. of Tax., Pass-Through Business Alternative Income Tax (PTE/BAIT) (last updated Dec. 27, 2021). | N.J. Div. of Tax., 2020 Form PTE-100, “Pass-Through Business Alternative Income Tax Return” (form must be filed electronically; paper copies not accepted); 2020 Form PTE-100 Instructions. | |
New Mexico (proposed) | Proposed. | To be added to N.M.’s Oil and Gas Proceeds and Pass-Through Entity Withholding Tax Act (currently codified at NMSA sections 7-3A-1 to -9). | NA | NA | NA | ||
New York | Apr. 19, 2021. | 2021 N.Y. Laws ch. 59, Part C (2021 N.Y. S2509-C, 2021 N.Y. A3009-C). | N.Y. Tax Law sections 860-867 (Art. 24-A). | None. | N.Y. Dept. of Tax. & Fin., Pass-through entity tax (PTET) (updated Jan. 7, 2022); TSB-M-21(a)C, (1)I, Pass-Through Entity Tax (Aug. 25, 2021); states with a tax substantially similar to PTET (updated Dec. 8, 2021). | File online return through N.Y. Dept. of Tax. and Fin. Online Services. | |
New York City | Preceded enactment of TCJA. | Not relevant. | UBT — N.Y.C. Admin. Code sections 11-501 to -540. S corporation — N.Y.C. Admin. Code section 11-60-610 (general corporation tax). | None. | NA | NA | |
North Carolina | Nov. 18, 2021. | 2021 N.C. Sess. Law 2021-180 (2021 N.C. SB 105), section 42.5. | N.C. Gen. Stat. sections 105-131.1A (S corporations), 105.153.3 (partnerships). | None. | None. | Not released. | |
Ohio (existing law) | Preceded enactment of TCJA. | Not relevant. | Ohio Rev. Code sections 5747.01(K) to 5733.04(O) (defining PTE); 5733.40 to 5733.41 (operating provisions); 5747.41 (withholding tax — individuals); and 5733.41 (withholding tax — other than individuals). | None. | See Ohio Dept. of Tax. website (Laws, Rules & Rulings). | Ohio Dept. of Tax., 2021 Form IT-1140 Pass-Through Entity and Trust Withholding Tax Return Instructions; 2021 IT-4708 Pass-Through Entity Composite Income Tax Return. | |
Ohio (proposed) | Proposed. | Ohio 134th Gen. Assem., S.B. 246 (as introduced) (Oct. 5, 2021). | Ohio Rev. Code section 5747.38. | NA | NA | NA | |
Oklahoma | Apr. 29, 2019. | 2019 Okla. Laws ch. 201, 2019 Okla. H.B. 2665 (enrolled). | Okla. Stat. tit. 68, sections 2355.1P-1 to 2355.1P-4. | None. | None. | Okla. Tax Comm’n, Form 586, “Pass-Through Entity Election Form (rev. 2021)”; 2021 Oklahoma Partnership Income Tax Forms and Instructions: Electing Pass-Through Entity (p. 6) (Form 514); 2021 Oklahoma Small Business Corporation Income and Franchise Tax Forms and Instructions (p. 7) (Form 512-S). | |
Oregon | July 19, 2021. | 2021 Or. Laws, ch. 589 (2021 Or. S.B. 727 (enrolled)). | 314 Or. Rev. Stat. (sections to be determined). | None. | Ore. DOR, Frequently asked questions (select “Entity Elective Tax” and “Personal income tax”); Pub. OR-17 Individual Income Tax Guide, Exception for Oregon resident partners and S corporation shareholders — Pass-through income taxes paid to another state (p. 104-105) (rev. Nov. 30, 2021). | Not released. | |
Pennsylvania (proposed) | Proposed. | 72 Pa. Stat. section 7306.2(f), 7307.8(f). | NA | NA | NA | ||
Rhode Island | July 5, 2019. | 44 R.I. Gen. Laws sections 44-11-2.2. and -2.3. | None. | R.I. Div. of Tax., FAQs on entity-level tax for pass-through entities (Dec. 24, 2019); Pass-Through Entities – Additional Information for Election to File/Pay at the Entity Level. | R.I. Div. of Tax., 2020 RI-PTE 2020 Pass-Through Entity Election Tax Return and Instructions; 2020 RI-1099E. | ||
South Carolina | May 17, 2021. | 2021 S.C. Acts 61 (ver. May 12, 2021). | S.C. Code Ann. section 12-6-545(G). | None. | S.C. DOR, Rev. Rul. 21-15 Active Trade or Business Income — Annual Election by Pass-Through Entity to Pay Tax at Entity Level (Income Tax) (undated); Tax Legislative Update for 2021 — S.B. 627 (Act No. 61) (Sept. 2021) p. 10-11 (summarizes legislation). | S.C. DOR, 2021 Form I-335, “Active Trade or Business Income Reduced Rate Computation” (must be attached to owner’s return). | |
Vermont (proposed) | Proposed. | 2022 Vt. H. 527, section 9 (adding elective PTE tax) and section 3 (resident credit for PTE taxes paid to other states). | Vt. Stat. Ann. secs. 5912a to 5912d. | NA | NA | NA | |
Virginia (existing law) | Preceded enactment of TCJA. | Not relevant. | Va. Code Ann. section 58.1-486.2. | Va. Dept. of Tax., Tax Comm. Rul. 15-240: Guidelines for Pass-Through Entity Withholding (Dec. 22, 2015) (last updated Mar. 22, 2016). | Va. Dept. of Tax., S Corporations, Partnerships, and Limited Liability Companies; Tax Bull. 05-6 Important Information Regarding Requirements for Investment Pass-Through Entities. | Va. Dept. of Tax., 2021 Form 502, “Pass-Through Entity Return of Income and Return of Nonresident Withholding Tax.” | |
Virginia (proposed) | Proposed. | Va. Code Ann. sections 58.1-390.1 to 390.3. | NA | NA | NA | ||
Wisconsin | Dec. 14, 2018. | 2017 Wis. Act 368, sections 1 through 12. | Wis. Stat. sections 71.04 to 71.775 (various sections were amended). | None. | Wis. DOR, Pass-Through Entity-Level Tax: Partnership Determining Income and Computing Tax (Jan. 12, 2022). | Wis. DOR, 2021 Sch. 3-ET Entity Level Tax Computation; 2021 Sch. 3-ET Instructions (for partnerships); 2021 Sch. 5S-ET Entity-Level Tax Computation; 2021 Sch. 5S-ET Instructions (for S corporations). | |
Abbreviations: PTE — Passthrough entity (for example, a partnership, S corporation, or LLC treated as a partnership or S corporation). SALT – State and local tax (with reference to SALT deduction limitation set forth in IRC section 164(b)(6)). UBT — Unincorporated business tax. | |||||||
State | Type | First Year PTE Tax Available | PTE Tax Law Sunset Provision | Elective/Mandatory | Eligible PTE Entities | Character of Members* | Requirements for PTE Tax Election | |
|---|---|---|---|---|---|---|---|---|
Alabama | New PTE tax. | Tax years beginning on or after Jan. 1, 2021. | None. | Elective (subject to revocation by PTE). | S corporations, partnerships, and LLCs treated as partnerships (but not DREs for U.S. FIT purposes). | No restrictions. | One-time election by greater than 50% of the voting control of the PTE. | |
Arizona | New PTE tax. | Tax years beginning after Dec. 31, 2021. | None. | Elective. | S corporations, partnerships, and LLCs treated as partnerships. | PTE tax election does not apply to PTE owners that are not individuals, estates, or trusts or that have not elected for the PTE tax to apply. | Annual election by individual, estate, or trust PTE owners that consent to tax at PTE level. | |
Arkansas | New PTE tax. | Tax years beginning on or after Jan. 1, 2022. | None. | Elective. | General partnerships, limited partnerships, LLCs, and S corporations for U.S. FIT purposes. | No limitations. | Annual election by greater than 50% of the voting control of the PTE. | |
California | New PTE tax. | Tax years beginning on or after Jan. 1, 2021. | Law expires Dec. 1, 2026. Not applicable to years beginning on or after Jan. 1, 2026. | Elective. | Entities taxed as a partnership or S corporation (which includes LLCs taxed as either but excludes general partnerships, which are not subject to tax; PTPs; and any entity that is permitted or required to be in a combined reporting group or that has a partnership as a partner, member, or shareholder). DREs are not “qualified entities.” | Only individuals, estates, and trusts. Partnerships are not eligible PTE owners. “Qualified taxpayer” does not include a DRE, corporation, or partnership. | Annual election by the PTE, and irrevocable when made. | |
Colorado | New PTE tax. | Tax years beginning on or after Jan. 1, 2022. | PTE tax election allowed only in a year in which the federal SALT deduction limitation applies. | Elective. | Entities taxed as a partnership or S corporation (which includes LLCs taxed as either). | “Electing pass-through entity owner” does not include a partner that is a C corporation that is unitary with the partnership. | Annual election by the PTE. | |
Connecticut | New PTE tax. | Tax years beginning on or after Jan. 1, 2019. | None. | Mandatory. | U.S. FIT partnerships and S corporations, except PTPs. Sole proprietor and single-member LLCs treated as DREs are not subject to PTE tax. | No limitations. | NA | |
District of Columbia | Existing UBT to partnerships and corporation tax applied to S corporations. | Existing. | None. | Mandatory. | UBT — Partnerships and LLCs treated as partnerships. Corporation tax — S corporations. | No restrictions (S corporations and partnerships may be required to join in combined reports with related members). | NA | |
Georgia | New PTE tax. | Tax years beginning on or after Jan. 1, 2022. | None. | Elective. | S corporations and partnerships (including LLCs treated as S corporations or partnerships for U.S. FIT purposes). | No restrictions. | Annual election by the PTE. | |
Idaho | New PTE tax. | Tax years beginning on or after Jan. 1, 2021. | None. | Elective. | S corporations and partnerships (including LLCs treated as S corporations or partnerships for U.S. FIT purposes). DREs cannot make the PTE election (although an election by a DRE parent is applicable to the DRE). | No restrictions. | Annual election by PTE signed by each member at time of election or by an officer of PTE who has authority to make the election. Election is irrevocable. | |
Illinois | New PTE tax. | Tax years ending on or after Dec. 31, 2021, and beginning before Jan. 1, 2026. | PTE tax election allowed only in a year in which the federal SALT deduction limitation applies. | Elective. | Partnerships (other than PTPs) and S corporations. | No restrictions. | Annual election by PTE. | |
Iowa (proposed) | New PTE Tax | Tax years ending on or after Dec. 31, 2022. | Tax years beginning on or after Jan. 1, 2026, and any year SALT cap does not apply | Elective. | Partnerships (other than PTPs) and S corporations. | No restrictions. | Annual election by PTE. An election is irrevocable once made. | |
Louisiana | PTE election to be treated as C corporation for state tax purposes. | Tax years beginning on or after Jan. 1, 2019. | None. | Elective (subject to revocation by PTE). | Any S corporation or entity taxed as a partnership for U.S. FIT purposes. By regulation, entities filing a composite partnership return are prohibited from making the election. | State’s PTE tax law appears to provide PTE tax income exclusion only to PTE owners that are individuals. State DOR guidance affirms that PTE owners that are corporations, estates, or trusts are not eligible for exclusion of income subject to PTE tax. | One-time election by PTE. Shareholders, members, or partners holding more than one half of the ownership interest in the electing entity must approve the election. (Ownership percentage based on examination of owners’ capital account balances or, in the case of an S corporation, based on ownership percentages.) | |
Maryland | New PTE tax (supplementing state’s existing PTE tax on distributions to nonresidents). | For PTE owners that are residents of the state — tax years beginning after Dec. 31, 2019. For PTE owners that are nonresidents of the state — already existing. | None. | Elective for distributive share of PTE income of PTE owners that are residents of the state; mandatory for distributive share of PTE income of PTE owners that are nonresidents of the state. | S corporations, partnerships, LLCs, business trusts, and statutory trusts not taxed as corporations under state law. | No restrictions. | PTE makes election for resident owners (PTE tax remains mandatory for distributive shares of nonresident owners). | |
Massachusetts | New PTE tax. | Tax years beginning on or after Jan. 1, 2021. | PTE tax election allowed only in a year in which the federal SALT deduction limitation applies. | Elective. | S corporations and partnerships (including LLCs treated as S corporations or partnerships for U.S. FIT purposes). Mass. DOR guidance also extends PTE tax to trusts. Sole proprietor and single-member LLCs are not eligible to make a PTE tax election. | No restrictions (although PTE tax base is determined solely based on cumulative amount of distributive share paid to S corporation shareholders or, for partnerships, partners who are natural persons or trusts or estates subject to Mass. taxation). | Annual election by PTE on its timely filed return for the year (e.g., Form 3 (partnerships), Form 355S (S corp. return)-Sch. S, or Form 2 (fiduciaries) and must be confirmed by electronic filing of Form 63D-ELT). Once made, election is irrevocable. | |
Michigan | New PTE tax. | Tax years beginning on or after Jan. 1, 2021 (retroactive from date of enactment). | PTE tax applies only in a year in which the federal SALT deduction limitation applies. | Elective (irrevocable for the next two years). | U.S. FIT partnerships and S corporations. But no PTPs, DREs, or financial institutions subject to the Michigan financial institution franchise tax can make a PTE tax election. PTE must have “substantial nexus” to Michigan to make PTE election. | No limitations (but exclude from PTE business income subject to tax share allocable to PTE members that are corporations, insurance companies and financial institutions). | Election made by making electronic payment of PTE tax through “Michigan Treasury Online” website. Election by PTE made by 15th day of 3rd month of the tax year of the election (except for 2021 tax year, election must be made by Apr. 15, 2022). A new PTE tax election must be made after expiration of a prior PTE election. | |
Minnesota | New PTE tax. | Tax years beginning after Dec. 31, 2020. | PTE tax election only allowable in a year in which the SALT deduction limitation applies. | Elective (annually). | S corporations, partnerships, and LLCs, except ones that have a partnership, LLC, or corporation as a partner, member, or shareholder. | No PTE owner can be a partnership, LLC, or corporation (other than one that is a DRE). Single-member LLC’s not taxed as an S corporation do not qualify for the PTE election. A PTE is not eligible to make the PTE tax election if, at any time during its tax year, one or more owners is not a qualified owner. | PTE and qualifying owners who hold more than 50% ownership interest in the PTE. Ownership determined based on owners’ capital account percentage. | |
New Jersey | New PTE tax. | Tax years beginning on or after Jan. 1, 2020. | None. | Elective (annually). | Partnerships, S corporations, and LLCs with at least one member liable for state’s PIT. Federal S corporation must make New Jersey S corporation election to participate. | At least one member of PTE must be subject to state’s PIT. | PTE and each PTE owner (or officer, manager, or member authorized to make election) consent to state’s PTE tax. | |
New Mexico (proposed) | New PTE tax (but added to existing N.M. Oil and Gas Proceeds and Pass-Through Entity Withholding Tax Act). | Tax years beginning on or after Jan. 1, 2022. | None. | Elective. | Any PTE as defined in NMSA section 7-3A-2(H) (which excludes sole proprietorships, estates, entities taxed as a corporation for U.S. FIT purposes, investment partnerships, single-member LLCs, or PTPs). | No limitations. | Authority delegated to state’s tax department to determine requirements. | |
New York | New PTE tax. | Tax years beginning on or after Jan. 1, 2021. | None. | Elective (annually). | Partnerships, New York S corporations, and LLCs treated as partnerships or New York S corporations (except a PTP). Single-member LLCs and sole proprietorships may not elect to pay the PTE tax. | No limitations. | PTE officer authorized to make election. | |
New York City | Existing UBT (partnerships) and corporation tax (S corporations). | Existing. | None. | Mandatory. | UBT – Partnerships and LLCs treated as partnerships. Corporation tax — S corporations. | No restrictions. | NA | |
North Carolina | New PTE tax. | Tax years beginning on or after Jan. 1, 2022. | None. | Elective. | S corporations and partnerships (except PTPs or partnerships that have a member during the year that is not an individual, estate, S corporation trust, or qualified pension plan or 501(c)(3) organization), including LLCs treated as S corporations or partnerships. | All PTE owners must be (1) an individual, (2) an estate, (3) a qualified S corporation trust, or (4) a qualified pension, profit-sharing, or stock bonus plan or 501(c)(3) organization. | Annual election by PTE. | |
Ohio (existing law) | Existing PTE tax on distributions to nonresidents. | Preceded enactment of TCJA. | None. | Mandatory. | S corporations and partnerships, LLCs of any other person, other than an individual, trust, or estate not classified as corporations for U.S. FIT purposes. | No restrictions (although PTE tax generally applies only to PTE distributions to state nonresident individuals — numerous statutory exemptions to “investor” (e.g., exempt organizations, C corporations, resident individuals)). | NA | |
Ohio (proposed) | Expand existing PTE tax to allow election to include residents. | Pending. | None. | Elective (as to Ohio residents). | S corporations and partnerships, LLCs of any other person, other than an individual, trust, or estate not classified as corporations for U.S. FIT purposes. | No restrictions (although PTE tax generally applies only to PTE distributions to state nonresident individuals — numerous statutory exemptions to “investor” (e.g., exempt organizations, C corporations, resident individuals)). | Annual election by PTE. | |
Oklahoma | New PTE tax. | Tax years beginning on or after Jan. 1, 2019. | None. | Elective. | S corporations, partnerships, and LLCs treated as S corporations or partnerships for U.S. FIT purposes. | No restrictions (although different tax rates apply to net income attributable to different PTE owners). | One-time election by PTE (effective until revoked). | |
Oregon | New PTE tax. | Tax years beginning on or after Jan. 1, 2022, and before Jan. 1, 2024. | PTE tax election only allowable in a year in which the SALT deduction limitation applies. | Elective. | S corporations, partnerships, or LLCs treated as S corporations or partnerships for U.S. FIT purposes. | All owners must be either (1) individuals subject to the state’s PIT or (2) PTEs owned entirely by individuals subject to the state’s PIT. | Annual election by PTE if consent given by all members of the electing PTE or if election is made by any officer, manager, or member of the electing PTE authorized to make the election. | |
Pennsylvania (proposed) | New PTE tax (grafted onto existing Pa. PIT PTE underreporting rules). | Effective date is 690 days from enactment, no specific provision. | None. | Elective. | S corporation or partnership (except PTP or a partnership that has a member during the year that is not an individual, estate, S corporation trust or qualified pension plan, or 501(c)(3) organization), including an LLC treated as an S corporation or partnership. | No specific restrictions. | Annual election by PTE. | |
Rhode Island | New PTE tax. | Tax years beginning on or after Jan. 1, 2019. | None. | Elective. | S corporations, partnerships, LLCs, and unincorporated sole proprietorships that are not taxed as corporations for U.S. FIT purposes. | An individual who is a shareholder of an S corporation; a partner in a general, limited, or limited liability partnership; a member of an LLC; a beneficiary of a trust; or a sole proprietor. | Annual election by PTE. | |
South Carolina | New PTE tax. | Tax years beginning after 2020. | None. | Elective. | Partnerships and S corporations (including LLCs taxed as partnerships or S corporations), when all owners are “qualified owners” or partnerships, and when those partnerships are owned directly or through other partnerships by “qualified owners.” | Each electing PTE owner must be (1) an individual, (2) an estate, (3) a trust, or (4) any other entity other than those taxed as corporations or exempt organizations (see S.C. Code Ann. sections 12-6-530 and 12-6-540 through 550). The existence of an owner that is not a “qualified owner” will disqualify the PTE from making the PTE tax election. | Annual election by PTE. | |
Vermont | New PTE tax. | Tax years beginning on or after Jan. 1, 2022. | None. | Elective. | A partnership, an S corporation, or an LLC with at least one member who is liable for tax on distributive proceeds under Vermont’s income tax laws during a tax year. | NA | Annual election by PTE if consent given by all members of the electing PTE or if election is made by any officer, manager, or member of the electing PTE authorized, under law or the PTE’s organizational documents, to make the election. | |
Virginia (existing law) | Mandatory (for distributive shares of PTE income of nonresident PTE owners). | Existing. | None. | Mandatory. | Any entity, including partnerships, LLCs, business trusts, and S corporations, that is recognized as a separate entity for U.S. FIT purposes. | Applies to distributive shares paid to nonresidents only. Does not apply to income of nonresident owners exempt from state tax. | NA | |
Virginia (proposed) | New PTE tax. | Tax years beginning on and after Jan. 1, 2021. | Tax years beginning before Jan. 1, 2026. | Elective. | Partnerships, S corporations, and business trusts (including LLCs taxed as either partnerships or S corporations). | “Qualifying pass-through entity” eligible to make the PTE election must be 100% owned by natural persons or other individuals eligible to be shareholders in an S corporation. | Annual election by PTE on its annual return. | |
Wisconsin | PTE election to be C corp. | Tax years beginning on or after Jan. 1, 2019. | None. | Elective. | Partnerships, S corporations, and LLCs treated as partnerships or S corporations. | No restrictions. | Annual election by PTE, but must have consent of persons who hold 50% of the capital and profits of a partnership or, in the case of an S corporation, 50% of the shares of the S corporation. | |
*For purposes of the limitations on the owners of a PTE, it should be understood that in no state can an S corporation (which is eligible for a state’s PTE tax) that has any disqualified owners for U.S. FIT purposes (for example, a corporate owner) be an S corporation that can elect into the state’s PTE tax. Abbreviations: DOR — (State) Department of Revenue or other tax administrative authority. DRE — Disregarded entity. PIT — Personal or individual income tax. PTE — Passthrough entity (for example, a partnership, S corporation, or LLC treated as a partnership or S corporation). PTP — Publicly traded partnership. SALT — State and local tax (with reference to SALT deduction limitation set forth in IRC section 164(b)(6)). UBT — Unincorporated business tax. U.S. FIT — U.S. federal income tax. | ||||||||
State | PTE Tax Base | PTE Tax Rate | Owner Income Tax Offset | When PTE Election Must Be Made | How Is Election Made? | Nature of Credit or Carryover | Estimated Taxes | Amount of Estimated Payments |
|---|---|---|---|---|---|---|---|---|
Alabama | PTE’s own taxable income apportioned or allocated to Alabama. | 5% (Highest marginal PIT rate.) | Exclusion of distributive share of PTE income from direct PIT liability of owner. | Anytime during the tax year, but no later than the 15th day of the third month following the close of the elected PTE tax year. | Online using Form PTE-E via Ala. DOR electronic portal, My Alabama Taxes. | NA | Same as applicable to corporations (by 15th day of 4th, 6th, 9th, and 12th months of taxpayer’s year (e.g., for calendar-year taxpayers, Apr. 15, June 15, Sept. 15, and Dec. 15)). | If Alabama liability is expected to exceed $500, must equal either (1) 100% of current year PTE tax or (2) 100% of prior year PTE tax. Special rules for 2021. |
Arizona | PTE’s own taxable income: (1) the portion of its income attributable to resident owners and (2) the portion of its taxable income attributable to nonresident owners derived from sources in Arizona. Income to owners that are not individuals, estates, or trusts is excluded. | 4.5% | Credit for share of PTE tax paid. | Due date or extended due date of the PTE’s income tax return. | Awaiting guidance. | Credit with five-year carryforward. | Same as applicable to individuals, provided the PTE’s taxable income exceeds $150,000. | Awaiting guidance. |
Arkansas | PTE’s own net taxable income. | 5.9% | Exemption. | Due date or extended due date of the PTE’s income tax return. | Awaiting guidance (presumably on the return). | NA | Required in equal quarterly installments based on the PTE’s tax year. | 90% of current year tax or 100% of prior year tax. |
California | “Qualified net income” of the PTE consisting of the income of “qualified taxpayers.” Generally, (1) the total of the resident owners’ share of the PTE’s net income from all sources and (2) the total of the nonresident owners’ share of the PTE’s income apportioned or allocated to California. | 9.3% | 94.9% of 9.3% of the pro rata share or distributive share of income subject to PTE tax. Credit cannot reduce amount of tax below California tentative minimum tax. | Due date of originally, timely filed return. | On the PTE’s timely filed return. For years after 2021, the PTE must make a timely payment of estimated taxes by June 15 of the tax year. | Three-year carryover of any excess. | Not addressed. Rely on existing estimated tax rules. | For 2021 — entire amount of elective tax on or before due date of the original tax return 2022-2025: Payment 1 (due on or before June 15) is $1,000 or 50% of the elective tax paid in the prior tax year, whichever is greater; payment 2 is the remaining amount (due on or before the due date of the original return without regard to extensions). |
Colorado | Each owner’s pro rata or distributive share of the PTE’s income attributable to Colorado and each Colorado resident owner’s pro rata or distributive share of the PTE’s income not attributable to Colorado. | 4.55% | Exclusion of owner’s share of PTE income subject to PTE tax. | Due date or extended due date of the PTE’s income tax return. | On the PTE return (awaiting guidance). | NA | Quarterly estimated tax payments (same as if the PTE were treated as a corporation). | If PTE liability exceeds $5k, the total required annual payment is the lesser of (1) 70% of the PTE’s net tax liability for the current year or (2) subject to some qualifications, 100% of the PTE’s net tax liability for the preceding year. |
Connecticut | Default — PTE’s own net taxable income sourced to Connecticut. Alternative Tax Base — PTE income attributable only to individual owners. Consisting of Connecticut-source income of all individual owners and resident portion of unsourced income. | 6.99% | 87.5% of distributive share of owner’s PTE tax. Before 2019, 93.01%. | NA (mandatory tax). | NA (mandatory tax). | None (refundable credit). | Regardless of PTE’s fiscal year, estimated taxes are due at fixed dates for calendar-year quarterly periods set forth in the law. | Required if annual PTE tax is $1,000 or greater. Payments must be 90% of current year PTE tax or 100% of prior year PTE tax. |
District of Columbia | UBT — PTE taxable income. S corpor-ation – taxable income as if filing as C corporation. | UBT — 8.25%; corporations — 8.25% | UBT — PIT and CIT payers qualify for credit for UBT paid. S corpor-ations — no credit. | NA (mandatory tax). | NA (mandatory tax). | NA | Quarterly payments. | NA |
Georgia | PTE’s own allocated and apportioned income to the state. | 5.75% | Exclusion of distributive share of PTE income from direct PIT liability of owner. | By due date of the PTE return including any extension. | On the PTE return. | NA | PTE treated as a corporation for purposes of estimated payments. | If PTE Ga. income exceeds $25,000, estimated payments required in equal quarterly installments of 100% of the tax due. |
Idaho | PTE’s own income. | 6.925% (The then-effective state corporate income tax rate.) | Credit for share of PTE tax paid. | For 2021, payment of PTE tax must be made by Dec. 31, 2021 (otherwise deductible in 2022). | On the PTE’s original, timely filed return. | Individual and corporate PTE owners entitled to fully refundable credit to the extent that share of PTE tax exceeds PIT or CIT liability. | No special provision. | No guidance. |
Illinois | PTE’s own net income — modifications to standard state definition of net income. Partnerships of other PTEs (tiered partnerships) must also deduct distributive share of PTE income already taxed. | 4.95% (Note: PTE tax is separate from, but in addition to, existing 1.5% personal property tax replacement tax for total rate of 6.45%.) | Credit equal to 4.95% of distributive share of PTE income subject to PTE tax. | By due date of the PTE return, including any extension. | On the PTE’s partnership or S corpor-ation return for the tax year for which the election is intended to apply. | Any excess credit not used treated as overpayment of PTE owner’s tax. | Reference to and reliance upon existing state’s income tax law on estimated tax payment requirements. PTE owner withholding suspended. | If PTE liability exceeds $500, the total required annual payment is the lesser of either (1) 90% of the PTE’s tax liability for the current year or (2) 100% of the PTE’s tax liability for the preceding year. |
Iowa (proposed) | PTE’s own net income determined under Iowa PIT law. | PIT tax rates under Iowa Code section 422.5A (currently progressive rate schedule with maximum rate of 8.53% (on taxable income of PTE exceeding $45k)). | Credit equal to the ratio of the PTE owner’s share of net income over the total net income multiplied by the state tax liability actually paid by the PTE. | Authority delegated to Iowa DOR to establish form and time. | Authority delegated to Iowa DOR to establish form and time. | Five-year carryover of any excess. | Reference to and reliance upon existing estimated taxes by corporations and financial institutions. | If PTE liability exceeds $1,000, the total required annual payment is 100% of the PTE’s tax liability for the preceding year. |
Louisiana | PTE’s own income as if the entity had been required to file an income tax return with the IRS as a C corporation. | Progressive rates for electing PTE: 2% (≤$25K), 4% (>$25K but <$100K), 6% (≥$100K). | Exclusion of distributive share of PTE income from direct PIT liability of owner. Only available to owners who are individuals (owners that are corporations, estates or trusts are ineligible for the exclusion). | Generally, on or before the 15th day of the fourth month after the close of the tax year in which the election is first effective. | Submitting special election form (La. DOR, Form R-6980, “Tax Election for Pass-Through Entities”), including proof of requisite owners’ approval and other required documen-tation. | NA | PTE subject to same estimated tax requirements applicable to other state taxpayers. | Quarterly estimated payments if PTE tax due is expected to exceed $500. |
Maryland | PTE’s income under IRC that is derived from or reasonably attributable to the PTE’s trade or business in the state. | Sum of (1) state’s corporate tax rate (8.25%) and (2) (a) applicable county rate (for resident PTE owners) or (b) statewide county rate (for nonresident PTE owners). | Credit against member’s own state tax liability equal to proportionate share of state PTE tax paid by PTE. | For PTEs other than S corpor-ations, due date of filing the return (15th day of the 4th month following close of tax year); for S corporations, 15th day of the 3rd month following close of tax year. | Filing a Md. Form 511, “Electing Pass-Through Entity Income Tax Return.” | No provision. | PTE subject to same estimated tax requirements applicable to other state taxpayers. | 90% of current year tax or 110% of the prior year’s tax. |
Massachusetts | “Qualified income taxable in Massachu-setts” defined to be PTE’s income determined under state’s PIT law and allocable to “qualified members” (i.e., S corporation shareholders or partners in a partnership that are natural persons or trusts or estates subject to Mass. PIT). | 5% (Nominal rate; because of partial credit, effective tax rate to qualified members is 5.56%.) | Credit for proportionate share of PTE tax times 0.9 and applicable against PIT of “qualified member.” | By due date of the original or extended return of the PTE. | On the original or extended return and confirmed electronically by filing Form 63D-ELT and paying the PTE Excise. | No provision. | PTE must make estimated payments under same terms and conditions applicable to other taxpayers under Mass. Gen. Laws ch. 62B (e.g., quarterly estimated payments by PTE). Mass. DOR guidance states such estimated payments by the PTE must be made even before the election is finalized. Special adminis-trative rule for 2021 requires payment of 2021 PTE estimated tax by Jan. 15, 2022. | If PTE tax due is expected to exceed $400, generally quarterly payments of at least 80% of annual PTE tax liability. |
Michigan | Only federal taxable income of the PTE (“business income”) allocable to individuals, other PTEs, estates, or trusts, and excludes that allocable to corporations, insurance companies, or financial institutions. Business income of the PTE to be determined after allocation or apportion-ment and subject to some adjustments (including deducting guaranteed payments for services rendered by an individual member of the PTE) and making adjustments for business income received from another electing or non-electing PTE. | 4.25% (Same rate as the rate imposed under MCL 206.51 (income tax rate on taxable income of a person other than a corporation) for the same tax year.) | Credit against PIT. | Awaiting guidance | Making electronic payments for the PTE tax through Michigan Treasury Online. | Any PTE tax in excess of PIT credit is fully refundable. | PTE that reasonably expects an annual tax liability of $800 is subject to same estimated tax requirements applicable to other state taxpayers (MCL 206.301). | Awaiting guidance. |
Minnesota | Sum of the tax liability of each qualifying owner of the PTE based on the PTE’s income. | 9.85% (Highest marginal state PIT rate.) | Subtraction of qualifying owner’s income subject to state’s PTE from that owner’s state PIT. | By due date of the original or extended return of the PTE. | Filing Schedule PTE, “Pass-Through Entity Tax,” no later than the due date or extended due date of the PTE’s income tax return. | Any PTE tax in excess of PIT credit is fully refundable | PTE must make estimated payments under same terms and conditions applicable to other taxpayers under Minn. Stat. section 289A.25. | 90% of current year tax liability reduced by some credits or 100% of prior year liability. Four equal quarterly installments due based on PTE’s fiscal year. |
New Jersey | Sum of distributable shares of New Jersey-source income to PTE owners consenting to PTE tax election. (Resident partners (but not resident S corporation shareholders) can claim 100% of PTE distributable share.) | Progressive rates based on PTE tax base: 5.675% (<$250K), 6.52% (≥$250K but <$1M), 9.12% (≥$1M but <$5M), 10.9% (≥$5M). | Credit (refundable) against PTE owner’s PIT liability. | On or before the original due date of the PTE’s return. | First, register the PTE with the N.J. Division of Revenue and Enterprise Services, then file the election form electronically on the N.J. Div. of Tax. website at NJ Pass-Through Business Alternative Income Tax (PTE) Online Filing and Payments. | NA | Quarterly on or before 15th day of 4th, 6th, and 9th month of current year and first month of succeeding year. | Generally, (1) 80% of the PTE tax shown on the return for the tax year (or if no return was filed, of the tax for such year) or (2) 100% of the tax shown on the tax return of the PTE for the preceding tax year. |
New Mexico (proposed) | PTE’s net income as determined under existing tax less allocations to PTE owners that are: (1) U.S., N.M., or subdivisions of either; (2) Indian nation in New Mexico or a political subdivision thereof; (3) IRC 501(c)(3) organiz-ations; or (4) corporate partner, which includes income as part of its unitary business income in New Mexico. | Higher of the maximum rate imposed under N.M. PIT law (NMSA 7-2-7) (currently, 4.9%) or CIT law (NMSA 7-2A-5) (currently 4.8%). | Exemption from PTE owner’s income subject to state PIT or CIT, as applicable. | Not later than the due date for the PTE’s federal return for the tax year. | Filing a complete PTE election in the form and manner described by the N.M. DOR. | NA | Same manner as provided under existing withholding tax law applicable to PTEs (quarterly payments). | Quarterly amounts as further directed by the N.M. DOR. |
New York | “PTE Taxable income” is generally the aggregate of the distributive shares of direct, individual owners of the PTE. Different treatment for residents and nonresidents and between S corporation shareholders and partners. Resident partners = 100% of partnership income share, while resident S corporation shareholders and nonresident partners and S corporation shareholders include only New York-source income (e.g., apportioned at entity level). | Progressive rates based on PTE tax base: 6.86% (<$2M), 9.65% (≥$2M but <$5M), 10.3% (≥$5M but <$25M), 10.9% (≥$25M). | Credit (refundable) against PTE owner’s PIT liability. | For 2021, by Oct. 15, 2021. For years beginning on or after Jan. 1, 2022, by Mar. 15 of the tax year. | Using PTE’s Business On Line Services Account. | None (owner’s share of PTE tax in excess of PIT liability fully refundable). | Regardless of PTE’s fiscal year, estimated taxes are due Mar. 15, June 15, Sept. 15, and Dec. 15 of the calendar year. Estimated tax must be paid online. | Not required for 2021. Thereafter, generally, (1) 90% of the PTE tax shown on the return for the tax year (or, if no return was filed, of the tax for such year) or (2) 100% of the tax shown on the tax return of the PTE for the preceding tax year. |
New York City | UBT — PTE taxable income. S corporations — as if treated as C corporations. | UBT — 4%; S corporations — 8.85% (see also alternative bases) | UBT — PIT (which applies only to NYC residents) and CIT taxpayers qualify for credit for UBT paid. S corpor-ations — no credit. | NA | NA | NA | Quarterly payments. | NA |
North Carolina | Equal to the sum of (1) the distributive shares of the income of the PTE of all members allocated or apportioned to N.C. and (2) the distributive share of the resident PTE owner’s income not attributable to N.C. | 5.25% (for 2021) (N.C. PIT rate imposed under N.C. Gen. Stat. section 105-153.7 (which by section 42.1(a) of the N.C. act is phasing down annually to 3.99% by 2026.)) | Deduction of income subject to PTE tax. | By due date of the original or extended return of the PTE (awaiting guidance). | On the original or extended return of the PTE (awaiting guidance). | NA | Same as applicable to corporations. | If PTE tax liability exceeds $500, generally, 90% of the PTE tax. |
Ohio (existing law) | “Adjusted qualifying amount” — generally, distributive share of “qualifying investor” state income from PTE. | 5% (PTE tax base to nonresident individual investors.) 5% (PTE tax base to nonresident beneficiaries.) 8.5% (PTE tax base to investors other than nonresident individuals.) | NA (Does not apply to resident PTE owners.) | NA | NA | NA (does not apply to resident PTE owners). | Same as applicable to corporations and individuals (depending upon nature of qualifying investor). | If PTE tax liability exceeds $500, generally 90% of tax liability. |
Ohio (proposed) | “Adjusted qualifying amount” — generally, distributive share of “qualifying investor” state income from PTE. | 5% (2022); 3% (2023 and thereafter). | Credit (refundable) against PTE owner’s PIT liability. | By the deadline to file the PTE’s return for the tax year (e.g., April 15 of the year beginning after the end of the tax year). | Filing a form with Ohio tax commiss-ioner. | None (owner’s share of PTE tax in excess of PIT liability fully refundable). | Same as applicable to corporations and individuals (depending upon nature of qualifying investor). | If PTE tax liability exceeds $500, generally 90% of tax liability. |
Oklahoma | Oklahoma net entity income (or loss) — sum of electing PTE’s items of income, gain, loss, and deduction. | 4.75% (if PTE owner is an individual, trust, or estate (highest marginal state PIT rate)) 4% (if PTE owner is corporation, PTE, or financial institution) | Subtraction from PTE owner’s income of distributive or allocated share of income subject to PTE tax. | Anytime during the preceding tax year or two months and 15 days after the beginning of the tax year. | Filing Form 586, “Pass-through Entity Election Form”; obtaining an acknow-ledgement letter from the Oklahoma Tax Commis-sion; and checking appropriate box as an electing PTE on PTE’s tax return (which must be filed electronic-ally). | NA | For tax years beginning on or after Jan. 1, 2020, electing PTE must pay estimated taxes under same schedule applicable to other taxpayers. | No specific guidance for PTEs. |
Oregon | Sum of PTE’s “distribu-table proceeds” (i.e., income derived or connected with sources within Oregon) to each member of the PTE. | Progressive rates based on PTE tax base: 9% (≤ $250k), 9.9% (>$250k). | Credit against PTE owner’s PIT liability. | By due date of the original or extended return of the PTE (awaiting guidance). | On the original or extended return of the PTE (awaiting guidance). | Any PTE tax in excess of PIT credit is fully refundable. | No provisions (although PTE owners are still required to make their own estimated tax payments, which are creditable against their share of the PTE tax liability). | No guidance. |
Pennsylvania (proposed) | All the PTE’s income allocable to resident partners or members, and the portion of the PTE’s income from sources within Pa. allocable to nonresident partners, members of share-holders. | 3.07% (applicable Pa. PIT rate) | Credit against PTE owner’s PIT liability. | On or before the due date or extended due date of the PTE’s tax return. | Presumably, on the PTE’s return. (awaiting guidance). | Credit against PTE owner’s PIT liability. | Estimated taxes required of an electing PTE as if it were treated as a corporation. | No specific guidance. |
Rhode Island | “Net income” reported on federal tax form schedules C and E but does not include specially allocated investment income. | 5.99% | Credit against PTE owner’s PIT liability. | Due on or before the 15th day of the third month following the close of the tax year. | On special form (RI-PTE) and remitting the PTE tax. | No provision. | Same as applicable to corporations (as PTE tax codified under business corporation tax law). | If PTE tax liability exceeds $500, generally 100% of the current year tax liability. |
South Carolina | Active trade or business income or loss as if the PTE were an individual (excludes passive investment income, capital gain, payments for services). | 3% (Reference to statutory rate schedule for “active trade or business income” of PTE owners that are not corporations.) | PTE owners exclude income subject to PTE tax from their income. | No later than the due date for filing the applicable income tax return, including extensions. | On the annual state partnership or S corporation return. No special election form has been prepared or required. | NA | Required for tax years after 2021. Cross-reference existing S.C. estimated payment rules applicable to corporations with quarterly dates for calendar- and fiscal-year taxpayers. | If PTE tax liability exceeds $100, generally 100% of the current year tax liability. |
Vermont (proposed) | Sum of each PTE member’s share of taxable distributable proceeds of the PTE. | Second highest marginal rate under state’s PIT law (Vt. Stat. Ann. section 5822) (currently 7.6%). | Refundable credit against PTE owner’s Vt. income tax liability. | No later than the due date for filing the applicable income tax return, including extensions. | Annual election although form and manner of making election delegated to Vt. commis-sioner of taxation. | None. | Same as applicable to corporations. | If PTE tax exceeds $500, quarterly payments required. |
Virginia (existing law) | Accumulated shares of PTE income from state sources of all nonresident PTE owners. | 5% | Credit for nonresident PTE owners for income subject to PTE tax. | NA | NA | NA | Nonresident owners still liable for own estimated payments. |
|
Virginia (proposed) | Accumulated Va. taxable income of the PTE owners under Va. Code. Ann. section 58.1-391. | 5.75% | PTE owners subtract distributive share of PTE income subject to elective PTE tax. | On the PTE’s timely filed annual return. | On the annual PTE return. | None. | No provision. | No provision. |
Wisconsin | PTE income as if it were a C corporation. | 7.9% | PTE owners exclude income subject to PTE tax from their income. | By the day the PTE’s regular tax return is filed, including any extension. | Check box on the PTE’s regular tax return. | NA | PTE subject to same estimated tax require-ments applicable to other state taxpayers. | Generally, 90% of the PTE tax due for the current year. |
Abbreviations: CIT — Corporate income tax. DOR — (State) Department of Revenue or other tax administrative authority. $xxxk — Thousands of U.S. dollars. PIT — Personal or individual income tax. PTE — Passthrough entity (for example, a partnership, S corporation, or LLC treated as a partnership or S corporation). UBT — Unincorporated business tax. | ||||||||
State | Nonresident Owner Obligation for PIT Return | Eligibility of State Resident Owners for OSTC for PIT for PTE Tax Paid to Other State | Can PTE Tax Credit Be Claimed by Nonresidents on Composite Return? | Liability for PTE Tax | Other |
|---|---|---|---|---|---|
Alabama | No provision. | None (PTE income excluded from PIT return). | No – PTE owner claiming a PTE tax credit must file its own Alabama return. | No special provision. | None. |
Arizona | No provision. | Resident credit for any tax that is “substantially similar” to the state’s PTE tax. | No provision. | PTE, but Ariz. DOR can under the new law collect from electing PTE owners their proportionate share of PTE tax not paid. | None. |
Arkansas | No provision. | Exclusion of income subject to a PTE tax in another state that is “substantially similar” to Arkansas’s. | No provision. | PTE and individual owners (based on pro rata share) of the PTE. | None. |
California | No, but the PTE can file a composite return, although owners joining in the composite return will lose the PTE elective tax credit. | Not addressed by bill. See generally Cal. Rev. & Tax Code sections 18001 to 18006 (PIT OSTC provisions). | No – PTE owner claiming a PTE tax credit must file its own California return. | No special provision. | None. |
Colorado | Nonresident owners of electing PTEs are not obligated to file state PIT returns if their shares of income are derived from PTEs subject to state’s PTE tax. | PTE is entitled to credit for taxes paid to another state on the resident share of PTE income taxed by another state, whether the other state taxes were paid by the PTE or by the owners. | No provision. | PTE is treated as the taxpayer. | None. |
Connecticut | Nonresident owners of electing PTEs are not obligated to file state PIT returns if their shares of income are derived from PTEs subject to state’s PTE tax. | PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax. | NA | No provision. | Combined election available for commonly owned PTEs (i.e., more than 80% common ownership). |
District of Columbia | NA | NA (Both taxes apportioned; no OSTC provided.) | NA | PTE only. | None. |
Georgia | Nonresident owners of electing PTE are not obligated to file state PIT returns if their shares of income are reported on the PTE’s return. | None. | No provision. | PTE only. | None. |
Idaho | Nonresident owners of electing PTEs are not obligated to file state PIT returns if their shares of income are reported on PTE return. | PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax. | No provision. | No special provision. | None. |
Illinois | Nonresident owners of electing PTEs are not obligated to file state PIT returns if their shares of income are derived from PTEs subject to state’s PTE tax. | PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax. (Ill. DOR published list of “substantially similar taxes.”) | No provision. | PTE is primarily liable for PTE tax, but if not paid, PTE owners are liable based upon a ratio of each PTE owner’s share of the net income of the PTE over total PTE net income. | None. |
Iowa (proposed) | A nonresident owner of an electing PTE is not obligated to file state PIT returns if the only source of income of the individual is from a PTE making a PTE tax election. | PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax. | Provision states that if PTE election made, a composite return is not required. | PTE is primarily liable but if electing PTE fails to pay tax, the PTE owners shall be liable. Each such PTE owners’ liability determined based on a ratio of the PTE owners’ share of the PTE net income over the total net income of the PTE. | None. |
Louisiana | No provision. | None. | No provision. | No special provision. | PTE entitled to state tax deduction of U.S. FIT it would have paid if it had filed with IRS as a C corporation. PTE tax election does not affect whether the entity is subject to state franchise (net worth) tax. Electing PTEs must file returns electronically. By regulation, the La. DOR reserves the right to terminate a PTE election if the entity shows a material change in circumstances, which expressly includes “a significant change in federal law.” |
Maryland | No provision. | State resident PTE owners eligible for credit for PTE tax paid to other state if other state provides a credit for tax paid to this state. | No, since Md. composite returns can only be filed by non-electing PTEs. | If partnership does not pay PTE tax, partners are liable for PTE tax only to extent of their distributions from the partnership (unless state demonstrates intention of partner to defeat imposition of PTE tax). | State PTE tax does not apply to distributive share or pro rata share of a member that is (1) a real estate investment trust (for U.S. FIT purposes) or (2) an entity exempt from taxation under IRC section 501 (that is, a nonprofit). A PTP can apply with state to exclude itself from PTE tax if entity files information report regarding its nonresident PTE owners with state. |
Massachusetts | No provision. | No provision (but see Mass. DOR Tax Dir. 19-1, “Application of the Massachusetts Personal Income Tax Credit for Taxes Paid to Another Jurisdiction to the Connecticut Pass-Through Entity Tax.” (Sept. 19, 2019)). | Yes. | No provision. | Requires state DOR to develop administrative regulations on PTE tax to trusts and other provisions to “ensure that the electing [PTE] and its . . . members pay an aggregate amount of tax under [PTE tax and PIT] generally equivalent to the amount that would have been paid” absent PTE tax election. |
Michigan | No provision. | No provision. | No provision. | No provision. | None. |
Minnesota | Nonresident PTE owner does not have to file state PIT return if PTE income is only state source income (except nonresidents with installment income). | Tax paid for PTE owner is treated as payment of the tax by the PTE owner (similar provision for corporate owner of PTE subject to PTE tax). | No provision. | No special provision. | None. |
New Jersey | Nonresident still must file a N.J. PIT return if he or she exceeds filing threshold. | Resident PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax. (Different statutes provide for credit under state’s PIT and CIT laws.) N.J. Div. of Tax. Guidance recognizes N.Y. and Conn. PTE taxes as “substantially similar”. | Yes. | PTE owners jointly and severally liable for PTE tax (except that a person admitted as a partner is not personally liable for any obligation before the person’s admission as a partner). | None. |
New Mexico (proposed) | No provision. | No provision. | No provision. | No provision. | None. |
New York | Nonresident continues to have a separate PIT filing obligation. | Resident PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax, but the other state must also impose a PIT similar to this state’s PIT and, in the case of taxes paid by an S corporation, the S corporation was treated as a N.Y. S corporation. N.Y. Dept. of Tax. & Fin. Issues list of “substantially similar” taxes. See N.Y. Dept. of Tax. & Fin., “States With a Tax Substantially Similar to PTET” (updated Dec. 1, 2021) (includes all states with PTE tax enacted since 2017 as well as Ohio). | No — each PTE owner claiming a PTET credit must file a N.Y. individual income tax return. | Several liability for PTE tax not to exceed distributive share of PTE tax liability to PTE owner. | None. |
New York City | NA | NA (both taxes apportioned; no OSTC provided). | NA | PTE only. | UBT — real estate and investment companies excluded from UBT. S corporations — 2015 city tax reform did not apply to S corporations, but still subject to general corporation tax. |
North Carolina | No provision. | Credits for taxes paid to other states are creditable to the PTE, not the owners, but statute provides that the owner’s share of the PTE’s income is treated as the income of the PTE owner subject to the OSTC and treated as imposed on the PTE owner for purposes of the state’s PIT. | No provision. | If PTE fails to pay PTE tax, its owners are not allowed deduction for their share of PTE tax. | None. |
Ohio (existing law) | Not required. | NA (does not apply to resident PTE owners). | No. | Qualifying investors can be held liable for PTE tax not paid. | None. |
Ohio (proposed) | Not relevant (PTE election applies only to distributive share of Ohio resident income). | No special provision. | Not relevant (PTE election only applies to distributive share of Ohio resident income). | Qualifying investors can be held liable for PTE tax not paid. | None. |
Oklahoma | Nonresident individual PTE owners do not have to file state income tax returns if their only source of state income is from one or more electing PTE taxpayers. | No special provision. | NA (income subject to PTE tax is excluded from owner’s reported income). | If PTE tax not paid, state tax commission can revoke the election (causing general PTE liability rules to apply). | None. |
Oregon | No provision. | No provision (although existing law (Or. Rev. Stat. section 314.082(1)) allows an individual an OTSC for “any income tax imposed on the individual or on an Oregon S corporation or Oregon partnership of which the individual is a member”); Ore. DOR FAQ 17. | No provision. | No provision. | None. |
Pennsylvania (proposed) | No provision. | Credit allowed at the electing PTE level. | No provision. | No provision. | None. |
Rhode Island | No provision. | A similar type of tax imposed by another state on the owners’ income paid at the state entity level shall be deemed allowed as a credit for taxes paid to another jurisdiction under existing OSTC rule. | No provision. | No provision (presumably PTE itself). | None. |
South Carolina | No provision. | None. | No provision. | PTE, but if PTE does not pay, direct and indirect PTE owners are liable on their proportionate shares of the PTE income. | S.C. Code section 12-6-545, enacted in 2006, allows election for PTE owner (including sole proprietors) to apply reduced income tax rate on “active trade or business” income (from “standard” up to 7% rate to 3% rate). For purposes of PTE tax, active trade or business income or loss of PTE must be apportioned, and none can be treated as income from personal services that is allocated. |
Vermont (proposed) | No provision. | Resident PTE owners entitled to credit for PTE taxes paid to another state that are “substantially similar” to this state’s PTE tax, provided that the credit allowed cannot exceed the amount that would have been allowed if the income were taxed at the individual level and not taxed at the entity level. | No provision. | No provision. | None. |
Virginia (existing law) | PTE tax withholding does not relieve nonresident owner of obligation to file a Virginia return. Income of nonresidents joining in a composite return not subject to PTE tax. | NA (Applies only to nonresidents.) | NA | PTE. | None. |
Virginia (proposed) | No provision. | None. | No provision (although existing law provides for composite returns for nonresidents with permission of Va. Dept. of Tax.). | PTE. | None. |
Wisconsin | No provision. | None (however, the credit for taxes paid to other states is taken at the PTE level against the share of PTE income allocated to Wisconsin residents). | No provision. | PTE, but if PTE does not pay, PTE owners are liable on their proportionate shares of the PTE tax. | None. |
Abbreviations: CIT — Corporate income tax. DOR – (State) Department of Revenue or other tax administrative authority. PIT — Personal or individual income tax. PTE — Passthrough entity (for example, a partnership, S corporation, or LLC treated as a partnership or S corporation). OSTC — Other state tax credit (or resident state tax credit). The PIT credit some states provide to resident taxpayers for the state taxes paid to other states. UBT — Unincorporated business tax. U.S. FIT — U.S. federal income tax. | |||||
FOOTNOTES
1 Steven N.J. Wlodychak, “They’re All Different and That’s the Problem: State PTEs,” Tax Notes State, Aug. 2, 2021, p. 455.
2 IRS Notice 2020-75, “Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes” (Nov. 9, 2020).
3 Lee A. Sheppard, “SALT Deductions for Investor Entities,” Tax Notes Federal, Oct. 4, 2021, p. 7 (“Realistically, regulations will never be proposed, not merely because the [SALT cap] is temporary and hope springs eternal for its repeal. But also, writing such regulations requires an ability to integrate state tax and individual and partnership concepts that the heavily siloed IRS does not appear to possess, as demonstrated by [Notice 2020-75].”).
5 New York v. Yellen, 408 F. Supp.3d 399 (S.D.N.Y. 2019), aff’d, 15 F.4th 569 (2d Cir. 2021), pet. for cert. filed, No. 21-966 (U.S. Jan. 3, 2022).
6 Mass. Department of Revenue, Form 63D-ELT, “Entity Level Tax” (draft as of Nov. 12, 2021).
7 Okla. Tax Commission, Form 586, “Pass-Through Entity Election Form” (rev. 2021). The procedures are outlined in the instructions to the form.
8 See, e.g., S.C. DOR, Rev. Rul. 21-15, Active Trade or Business Income — Annual Election by Pass-Through Entity to Pay Tax at Entity Level (Income Tax), FAQ 11: “How Does the Entity Notify Owners That the Election Was Made or Revoked for the Current Tax Year?” (Dec. 2, 2021).
9 Mich. Department of Treasury, “Notice: Instructions for Electing Into and Paying the Flow-Through Entity Tax” (Dec. 22, 2021) (“A payment submitted timely through [Michigan Treasury Online] will be deemed to be a valid [Michigan elective PTE tax] election for the tax year specified on that payment.”).
10 See, e.g., N.J. Division of Taxation, “PTE/BAIT: Passthrough Business Alternative Income Tax Act”; Ore. DOR, FAQ 4: “Which Entities May Elect to Pay the Passthrough Entity Elective Tax?”.
11 See, e.g., Calif. Franchise Tax Board, “Passthrough Entity (PTE) Elective Tax — PTE Election — How to Make the Election”; Ill. DOR, “Questions and Answers: What Is the Passthrough Entity (PTE) Tax?” (“The election to pay the PTE tax is made on Form IL-1065, ‘Partnership Replacement Tax Return,’ or Form IL-1120-ST, ‘Small Business Replacement Tax Return,’ for tax years ending on or after December 31, 2021.”); and N.Y. Department of Taxation and Finance, “Passthrough Entity Tax (PTET): How to Make the Election” (updated Jan. 7, 2022).
12 Mass. DOR, “Elective Passthrough Entity Excise” (“How and when does an eligible PTE make an election to pay the PTE Excise? (Updated Dec. 15, 2021 The [PTE tax] election is made annually by a PTE on its timely filed [Massachusetts] Form 3, Form 355S — Schedule S, or Form 2 and is confirmed by submitting new Form 63D-ELT.”).
13 La. Admin. Code tit. 61:I, section 1001(A)(3)(a); see also La. DOR, “Form R-6980i Instructions for Passthrough Entity Tax Election (2/20).”
14 La. Admin. Code tit. 61:I, section 1001(C)(3)(a).
15 See Mass. DOR, “Working Draft TIR — Passthrough Entity Excise: IV. Computation of PTE Excise” (Dec. 30, 2021) (“Income attributable to nonresidents is subject to the PTE Excise only to the extent that it is apportioned to Massachusetts using the PTE’s Massachusetts apportionment percentage for the tax year.”).
16 See N.J. P.L. 2021, c.419 (2021 N.J. A6110 and 2021 N.J. S4068 signed by the governor on January 18, 2022) (amends the N.J. PTE tax law to allow an electing partnership to include 100 percent of distributive share of income to N.J. residents to be used to compute elective PTE tax).
17 IRC section 1361(b)(1)(D) (“For purposes of this subchapter [S], the term ‘small business corporation’ means a domestic corporation which is not an ineligible corporation and which does not . . . (D) have more than 1 class of stock.”); see also Treas. reg. section 1.1361(b)(iv). See, e.g., N.Y. State Bar Association Tax Section, “Report No. 1446 — Report on New York State’s Potential Response to Internal Revenue Service Notice 2020-75 and the State’s Resident Tax Credit” (“We also note that a partial election at the entity level [allowing some S corporation shareholders to elect into the then-proposed N.Y. PTE tax regime and others to opt out] likely would not work for S corporations, as it would not appear to be consistent with the one class of stock requirement of section 1361(b)(1)(D) of the IRC or the requirement of pro rata allocations under section 1366(a)(1).”).
18 See, e.g., Mass. DOR, “Elective Passthrough Entity Excise: Frequently Asked Questions,” “Are Guaranteed Payments Included in the Income Subject to the PTE Excise?”; and Md. Office of the Comptroller, “Frequently Asked Questions on the Maryland Passthrough Entity Tax, No. 6 Guaranteed Payments” (Dec. 27, 2021).
19 Calif. Franchise Tax Board, “Help With Passthrough Entity Elective Tax: Frequently Asked Questions — Qualified Net Income.” On Feb. 8, California Gov. Gavin Newsom signed into law technical corrections to the state's PTE tax law introduced on Feb. 2, that included a provision effectively retroactive to the original date of enactment of the state's PTE law clarifying that guaranteed payments are in fact part of the state's PTE tax base. In addition, the new law allows a PTE with either a partnership as a member or a DRE that is owned by an otherwise eligible PTE owner to make a PTE election. See 2022 CA S.B. 113 (enrolled version), section 14 (amending Cal. Rev. & Tax. Code section 19900) and section 15 (amending Cal. Rev. & Tax. Code section 19902).
20 Ga. Comp. R. & Regs. 560-7-3-.03(8) (“If an electing pass-through entity has a pension plan where certain qualified retirement income is paid to retired owners (normally as a guaranteed payment) and such income can only, based on Federal law, be taxed by a retiree’s state of residence in the year of payment, such electing pass-through entity shall subtract such guaranteed payment from its Georgia’s income before allocating and apportioning such income pursuant to [Ga. Code] section 48-7-31.”).
21 4 U.S.C. section 114 (limitation on state income taxation of some pension income).
22 See Wis. DOR, “2021 Wisconsin Schedule 3-ET Instructions: Result of Making the Election, Losses/Deductions — Charitable Contributions.”
23 See, e.g., Wis. DOR, “2021 Schedule 5S-ET Instructions: Result of Making the Election, Deductions/Losses” (applicable to PTEs treated as S corporations); and “2021 Wisconsin Schedule 3-ET Instructions: Result of Making the Election, Losses/Deductions.”
24 S.C. DOR, “Rev. Rul. 21-15, Active Trade or Business Income — Annual Election by Passthrough Entity to Pay Tax at Entity Level (Income Tax),” at 3 (“Since tax year 2006, [S.C.] Code Section 12-6-565 . . . has allowed individuals, estates, or trusts to use an ‘optional’ income tax rate to compute the [South Carolina] tax on ‘active trade or business income or loss’ received from a pass-through business in lieu of the ‘standard’ income tax rate under [S.C.] Code Section 12-6-510.”).
25 See id. at “Part 3 — Entity Level Tax on Active Trade or Business Income — General Entity Computation Questions” (at 17 to 30.).
26 N.Y. Tax Law section 864(b)(1); see also N.Y. Department of Taxation and Finance, “Passthrough Entity Tax (PTET): Filing Forms and Paying Taxes — Estimated Taxes” (updated Jan. 7, 2022).
28 See, e.g., Minn. DOR, “Law Change FAQs for Tax Year 2021: Passthrough Entity (PTE) Tax” (“Can I transfer estimated payments made to my individual income tax account to my pass-through entity’s business income tax account? No. Minnesota law prohibits transfers from one taxpayer’s account to another taxpayer’s account. You cannot transfer estimated payments made to your individual tax account to your pass-through entity’s business tax account.”).
29 See, e.g., N.J. Division of Taxation, “PTE/BAIT FAQ — Making Estimated Tax Payments.”
30 N.J. Division of Taxation, “PTE/BAIT FAQ — Nonresidents” (“Can Pass-Through Business Alternative Income Tax electing entities still file a composite return, NJ-1080-C on behalf of qualified nonresident members who elect to be included in the composite filing? Yes.”).
31 Compare Ill. DOR, “Passthrough Entity Information (Publication 129): What Other States Have a Substantially Similar Entity-Level Tax?” (as of Dec. 29, 2021), with N.Y. Department of Taxation and Finance, “States With a Tax Substantially Similar to PTET” (as of Dec. 3, 2021).
32 Ohio Gen. Assembly, S.B. 246 (as introduced) (amending Ohio tax law to levy a tax on a passthrough entity’s income apportioned to Ohio and to authorize a refundable income tax credit for an owner for the tax paid).
33 Wlodychak, “I Told You So: Maine Denies Resident Credit for Other State’s PTE Tax,” Tax Notes State, Nov. 8, 2021, p. 613.
34 [Individual Taxpayer] v. Maine Revenue Services, Dkt. No. BTA-2020-1 (Maine Bd. of Tax App. 2021).
35 Va. DOT letter to Vivian J. Page, CPA, Virginia Society of CPAs, “Ruling Request: Credit for Taxes Paid to Another State Virginia CPAs” (Dec. 28, 2021).
36 See Ind. DOR Info. Bulletin 28 Income Tax February 2022 “Application of State and County Income Taxes to Residents With Out-of-State Income and Nonresidents With Indiana Source Income — State Tax Agreements (replaces Information Bulletin #28, dated November 2016),” at p. 4 (“Taxes imposed directly at the entity level, including but not limited to pass through entity taxes imposed as a federal state and local tax limitation workaround, are not eligible for th[e Indiana] credit [for taxes paid to other states].” (emphasis added)) and at p. 2. (“In the case of tax credits, Indiana only allows credits for individual income tax paid to other states or localities. Other taxes such as property taxes, corporate income taxes, and unincorporated business taxes are not allowed as a basis for claiming such credits.”). This latter parenthetical is identical to the language as it appeared in the November 2016 version of the bulletin and was unchanged by the Indiana DOR in this recent update. The February 2022 update to the bulletin also makes clear that this credit is unavailable for Indiana local income tax purposes as well (see p. 5). Thanks to Rob Piechota at Alvarez & Marsal Taxand LLC, Atlanta, for bringing this development to my attention.
37 See Va. Code section 58:1-332(C) (“For purposes of this section, the amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation.”).
38 Va. DOT letter to Virginia Society of CPAs, supra note 35, at 3.
39 S.B. 246 (as introduced), supra note 32.
42 2022 Vt. H. 527, section 9 (adding elective PTE tax) and section 3 (resident credit for PTE taxes paid to other states).
44 See Va. Code section 58.1-486.1 et seq.
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