How I learned to stop worrying and love the Pass through entity tax
How paying more in tax can help you pay less in tax (no seriously!)
What is a Pass Through entity tax? - Remember back in 2018 when the tax cuts and jobs act limited the amount of State and Local (SALT) taxes you could deduct? Well the high tax states remember, and since then they’ve been looking for a workaround. The pass through entity tax (PTET) is it!
How does this work? - The way the PTET works is that eligible entities (S-corporations and partnerships in most cases, but CA also allows single member LLC’s) can opt in to the PTET system. When they do, the business pays a tax on the income that would pass through to the shareholders (e.g. the same income they’d be paying personal tax on). Then the shareholders get a tax credit for the amount of PTET that was paid on their behalf.
So I’m just paying tax a different way, how does that save taxes? - at the state level, yeah you’re just changing how you pay the tax in, but at the federal tax level, businesses are allowed a deduction for tax levied on the business. That means that all that state tax you were paying that wasn’t deductible before, is now deductible!
This sounds great, how do I opt in? - Each state operates differently but here’s a quick summary:
NY - to elect into the PTET for 2025, you must have elected in by 3/15/25, but you can opt in for 2026 until 3/15/26!, not sure how and where? Log into your NYS Tax account and here’s a quick video of where to make that election
NYC - NYC has created its own PTET and the election is made in the same link as your NYS PTET.
CA - To elect for 2025, you need to make a payment of 50% of your 2024 PTET or $1000, whichever is greater by 6/15/25, then make the election on the 2024 tax return next March. If you don’t make that 6/15 payment, you can’t opt in!
NJ - The NJ Business Alternative Income Tax (BAIT) requires a Separate Registration made during the tax year
What happens if I pay too much in PTE Tax? - Each state is different, but in NYS If you paid more in PTE tax than was needed to offset your state tax liability, you can have the difference refunded to you, just like other estimated payments. CA is subject to some limitations on how much of the PTET may be refundable.
I have an LLC can I participate in this? - The NY PTET is only available to S-corporations and partnerships. LLC’s that are taxed as partnerships qualify, but unfortunately LLC’s taxed as sole proprietors cannot participate in this program. In CA, single member LLC’s CAN participate!
How much $ will I save by making this election? - While every situation is unique, most pass through entities with taxable income will end up saving by using these programs. Reach out and we can run a tax projection to determine if the PTET programs are right for you and your business!