PTE Taxes

[Beersheba]

I guess I'm way behind the times, but not until 2021 when Alabama embraces the "pass-through-entity" tax did I take note.

What is the big deal? Are states so bereft and desperate that they would choose to go after entities that have already made their choices? Is it not enough that the shareholders/partners be taxed at their full-up rates at the personal level?

Have I missed the boat? What is the thinking behind this on the behalf of the taxing authorities? Just more money? or trying to compensate for other taxes they are not receiving?

I keep hearing about a credit resulting from this for the individuals. Is this thing optional in return for a credit?

Maybe a link would help - but a single link would not apply to all the states jumping on board with this.

[Lion]

Each state is different. In CT, it's NOT optional at the PT level. But, it provides the individuals credits on their state returns. So it helps make up for the SALT cap eliminating full itemized deductions for SALT on Schedule A. You will want to read up on your state.

[Rapid Robert]

To elaborate on what Lion said -- in general, the PTE (it is elective in CA) is intended to be tax revenue neutral at the state level - the amount of state tax the entity pays should be equal to the state tax credit that the individual who owns the entity receives. (details may vary, and there is no iron-clad guarantee that it will work out to the advantage of everyone). The net reduction in tax is at the federal level, where the entity passes through its deductiion for (elective) state taxes paid to the owner(s), in the sense that their net taxable income from the entity is reduced. It's been blessed by the IRS.

It's been messy in CA, with several pieces of legislation needed to "fix" what some people identified as needless limitations or unintended interactions with other credits, AMT, etc.

The only people who truly receive a net benefit are tax pros who charge for the work. The business owners are only "working around" the temporary SALT deduction limitation, which was set at $10K (instead of $zero, or $50K -- ask yourself why). And it's only relatively well-off business owners who benefit, not the wage earner who may be the victim of the SALT deduction limit just as much.

Early on there was some talk in states like NY and NJ to create an elective employment tax that would work the same way for wage earners as the PTE tax for business owners, I don't know how far those efforts got.

[TAXNJ]

For any interest - NJ:

https://www.nj.gov/treasury/taxation/ptepmtsystem.shtml

and

https://www.state.nj.us/treasury/tax...te/index.shtml