Small businesses are typically set up as \u201cpass-through entities\u201d which means that their businesses are not \u201ctaxpayers\u201d. As opposed to \u201cC Corporations\u201d, the income and deductions of the business \u201cpass-through\u201d to the owners where the individual owners pay the income tax on their respective share of the business\u2019 taxable income.<\/p>\n\n\n\n
US taxpayers (e.g., individual owners of pass-through businesses) are generally subject to at least two income tax jurisdictions: federal tax (IRS) and their resident state tax, unless they live in a no income tax state like Florida.<\/p>\n\n\n\n
Prior to 2018, those state income taxes (e.g. NC income taxes) have generally been deductible for individual taxpayers claiming itemized deductions. Said differently, state income tax payments are generally able to be deducted against an individual\u2019s federal taxable income, but not the other way around. <\/p>\n\n\n\n
However, since tax year 2018, with the passing of the Tax Cuts and Jobs Act (TCJA), state income tax deductions have been \u2013 at best \u2013 limited to $10,000 for taxpayers that claim itemized deductions. If the standard deduction was more favorable \u2013 something that has been very common since 2018 \u2013 then generally you would not<\/em><\/strong> have received any<\/em><\/strong> federal tax benefit of making state income tax payments.<\/p>\n\n\n\n To circumvent these unfavorable rules, state tax authorities have since created a \u201cPassthrough Entity election\u201d or a \u201cPTE\u201d election.\u00a0 The PTE election essentially entails treating PTEs (namely partnerships and S Corporations) as if they were C Corporations at the state income tax level.\u00a0 In other words, the S Corporation or partnership elects to pay their own state income tax on the business\u2019s income directly.\u00a0 North Carolina is one such state that recently passed a PTE election which is available beginning with tax year 2022.<\/p>\n\n\n\n Note that the state\u2019s PTE election by itself does not allow for the federal tax deduction for state income tax payments.\u00a0 That is up to federal tax laws and the IRS interpretation.\u00a0 IRS Notice 2020-75 is the current authority on the deductibility of such PTE state income tax payments.\u00a0 It says \u201cIf a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made.\u201d\u00a0 In other words, IRS Notice 2020-75 generally allows federal income tax deductions for partnerships and S Corporations that have made the PTE election (and paid the appropriate state tax) in states that have adopted a PTE election.\u00a0<\/p>\n\n\n\n The PTE election specific rules and calculations are in their nascence and are complex. The treatment of such payments at both the Federal and state levels is still contentious and the procedures are still being vetted. <\/p>\n\n\n\n Having said that, the PTE election can be a valuable tool in helping small businesses deduct more of their state income tax payments. Determining if the PTE election is viable for your small business depends on many factors that aren\u2019t able to be covered here.<\/p>\n\n\n\n Give us a call today or visit our website to schedule your meeting to discuss the PTE election and determine if it\u2019s right for your small business.<\/p>\n","protected":false},"excerpt":{"rendered":" The PTE election can be a valuable tool in helping small businesses deduct more of their state income tax payments.\u00a0 Determining if the PTE election is viable for your small business depends on many factors that aren\u2019t able to be covered here.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[18,17],"tags":[21,20,19,8,23,22,9],"class_list":{"0":"post-26","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-state-income-tax","7":"category-tax-planning","8":"tag-passthrough-entity","9":"tag-pte","10":"tag-pte-election","11":"tag-small-business","12":"tag-small-business-tax","13":"tag-tax-deductions","14":"tag-tax-planning","15":"entry"},"_links":{"self":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/26"}],"collection":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/comments?post=26"}],"version-history":[{"count":1,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/26\/revisions"}],"predecessor-version":[{"id":27,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/posts\/26\/revisions\/27"}],"wp:attachment":[{"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/media?parent=26"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/categories?post=26"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.chrismasseycpa.com\/blog\/wp-json\/wp\/v2\/tags?post=26"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}