​PTE Election - Short Form​​​

What is the PTE Tax (PTET) Election?

• The PTET election applies only to S-Corporations and Partnership, although some states may also allow it for Irrevocable Trusts. 
• Under the Tax Cuts and Jobs Act of 2017 (TCJA), the federal government limited the amount of state tax deductions available. 
• Under the TCJA, PTE owners can only deduct up to $10,000 of state and local taxes (SALT) on their personal return. 
  • For example, for a PTE business owner that has a $70,000 SALT liability that is paid at the personal tax level, that business owner will get a maximum federal deduction for $10,000. The $60,000 balance of that tax is what is called "leakage." 
  • In response, certain states are now allowing PTE business owners to recover some of that "leakage" via a PTET Election. 
  • The PTE business owner makes an election choosing to pay SALT taxes through the business at the state level which alleviates that additional "leakage." 
• By filing a PTET Election, the business owner makes the deduction at the Federal level and, therefore, is not limited at the state level by a $10,000 cap SALT deduction. 

How Does It Work? 

• A business must first have positive taxable income to take the PTET Election.
• Once the PTET Election is made by the business, the state level tax payment is shifted to the business and becomes a federal tax deduction for the business. 
• This results in lower income number on the business owner's K-1. 
• The business owner will also receive a credit on the state side on the personal return for the state taxes that the business paid.
• Resulting credits can either be refunded or carried forward, depending on the state.

Making the PTET election is not just an automatic "check the box and move on" decision. A PTE business owner should go through an analysis to determine if making the PTET election is right for them, especially if there are multiple owners who live in different states where one may have the PTE election and the other may not. One consideration is that some states have irrevocable elections and some states have revocable elections.  However, in almost all cases, we expect states to reverse these laws, if and when Congress removes the $10,000 cap. 

We recommend S-Corporations or Partnerships explore this opportunity given it is now available in 29 states, with more states expected to enact similar laws. There is a great opportunity for business owners in 2022 to save on taxes by making this special election. 

The PTET election is a new and ever-changing landscape in tax law. The GO CPA team is continually monitoring tax law updates and how this is progressing across the remaining states so we can inform you of the options available in order to take advantage of this election. If you have questions about the PTET election and whether it is applicable to your pass-through entity, send our team a message in Soraban.