BDO USA: State Pass-through Entity Tax Elections: Weighing the Pros and Cons (March 2022)

BDO USA has published an article, “State Pass-through Entity Tax Elections: Weighing the Pros and Cons”, published on BDO USA. The abstract is as follows:

More than 20 states now allow pass-through entities (PTEs) to elect to be taxed at the entity level to help their residents avoid the $10,000 limit on federal itemized deductions for state and local taxes, also known as the “SALT cap.” For PTEs electing into a state PTE tax regime, the federal pass-through income of members is reduced by the amount of the state PTE tax, effectively bypassing the member’s state and local tax itemized deduction limitation.

State elective PTE tax regimes generally fall into one of two groups:

– States in the first group (e.g., Colorado, North Carolina, and Wisconsin) allow members to reduce their adjusted gross income (AGI) by their pro rata or distributive share of income from an electing PTE. 

-tates in the second group (e.g., California, Illinois, and New York) require members to include their distributive share of PTE income in their AGI but allow members a tax credit for their share of the income taxes paid by the PTE.

State PTE regimes also vary in terms of when and how the PTE tax election must be made, whether the election is binding or can be made annually, who is authorized to make the election on behalf of the PTE and whether members of electing PTEs are required to file returns. Electing PTEs also need to be mindful of whether they are required to comply with a state’s withholding or composite return requirements.


Click here to read BDO USA’s summary of “State Pass-through Entity Tax Elections: Weighing the Pros and Cons”

Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.

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