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SALT Alert: Pass-Through Entity Tax (PTET) Election Update

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With the 2023 tax year extended due dates around the corner, many taxpayers and their advisors are considering whether electing into state pass-through entity tax (PTET) regimes would be beneficial. The first six months of the 2024 calendar year have seen several states make changes to existing PTET regimes or issue clarifying guidance on existing rules. This article provides a summary of these updates that taxpayers should be aware of as they evaluate the implications of PTET elections for tax year 2023 and beyond.

Alabama

Legislation enacted in April extends the due date for eligible pass-through entities (PTEs) to elect to be taxed at the entity level in Alabama for tax years beginning on or after January 1, 2024. For tax years beginning before December 31, 2023, the Alabama PTET election must be made on or before the 15th day of the third month after the close of the tax year. Beginning in 2024, an electing PTE may submit the election to the Alabama DOR on or before the due date for the tax return, including any extensions. Additionally, the legislation makes changes to the actual procedures for making the election. For tax years beginning prior to January 1, 2025, the election must be made through the pass-through entity’s “My Alabama Taxes” online account. For tax years beginning on or after January 1, 2025, the election will be made on the actual return filing. The changes were enacted by HB 187 on April 25, 2024.

Arizona

In April, Arizona released Publication 713: The Arizona Pass-Through Entity Election, which provides additional guidance on Arizona’s elective PTET. Although the updated guidance addresses several FAQs, the most notable relates to the PTE credit available to owners of an electing pass-through entity. The guidance clarifies that the credit for PTE tax paid is not refundable at the owner level. Additionally, the guidance reminds Arizona resident taxpayers that the statutory credit ordering rules require that the credit for taxes paid to another state is calculated and applied after all other credits. Since the Arizona credit for taxes paid references the actual amount of Arizona income tax liability in the calculation, Arizona resident PTE owners whose PTE tax credit covers their entire Arizona tax liability would not be eligible for a credit for taxes paid to other states. The guidance notes that the department acknowledges that this situation may result in double taxation of income for Arizona resident owners of an electing pass-through entity and that a legislative fix would be required to remedy the issue.

Georgia

In April, Georgia enacted HB 1023, which matches the corporate and PTET rates to the individual income tax rate changes enacted in HB 1015. This legislative change lowers the PTET rate from 5.4% to 5.39% for tax years beginning on or after January 1, 2024.

Hawaii

In February, the Hawaii Department of Taxation adopted temporary administrative rules related to the state’s PTET. Among other topics, the rules address procedures for making the election, income tax credit applicability and allowance, filing and computing the tax at the PTE level and procedures for estimated payments.

Idaho

As of January 1, 2024, the Idaho corporate tax rate (and, consequently, the applicable PTET rate) is lowered from 5.8% to 5.695%. See HB 521, enacted on March 29, 2024, for additional information.

Louisiana

In March of this year, the Louisiana Department of Revenue adopted rule changes to implement legislative updates to the PTET enacted in 2023. Specifically, the rules provide for a new prospective PTET election termination application process. Entities wishing to terminate their PTET election may file for prospective termination by submitting all required documentation to the Department sixty days prior to the close of the tax year. The rule changes also grant an income exclusion for trusts, estates, or partnerships that are owners in any entity that made a PTET election for a tax period beginning on or after January 1, 2023. For additional information, see page 406 of the March 2024 edition of the Louisiana Register.

Mississippi

Mississippi’s Department of Revenue issued updated answers to FAQs in March of this year addressing the state’s elective PTET regime. The updated guidance provides clarification around eligibility for the PTET election, procedures for making and revoking the election, return filing, estimated payments and the credit for taxes paid under the PTET regime.

New York

As part of New York’s PTET regime, resident partners, members, or shareholders of an electing PTE are allowed a credit against their New York state tax for any PTET imposed by another state that is “substantially similar” to the PTET imposed under New York’s laws. On January 3, 2024, the New York Department of Taxation and Finance posted a listing of states with PTET regimes that it considers to meet the “substantially similar” definition, based on all legislation enacted as of December 31, 2023.

North Carolina

Legislation passed in May extends the deadline for making North Carolina’s PTET election, specifically for the 2022 tax year. Taxpayers who wish to elect into the North Carolina PTET for 2022 may file an amended return by July 1, 2024 (rather than the previous deadline of October 15, 2023). For more information, see SB 508, signed by the governor on May 15, 2024.

Oklahoma

Legislation enacted in April modifies the procedures and deadline for making the PTET election in Oklahoma. Previously, entities were required to file Oklahoma Form 586 within two months and fifteen days of the beginning of the tax year to elect into the pass-through entity tax regime. HB 3559 added a provision allowing a qualifying PTE to make the election by filing an income tax return before the applicable due date, including extensions.

Oregon

In March of this year, Oregon enacted legislation that extends the tax years to which the state’s elective PTET applies. Previously, qualifying PTEs were eligible to elect into entity-level taxation for tax years beginning before January 1, 2024. SB 1526 extends the applicability to tax years beginning before January 1, 2026.

Utah

Applicable for all tax years beginning on or after January 1, 2024, Utah lowered the individual income tax rate (and, consequently, the PTET rate) from 4.65% to 4.55%. The change was effected by SB 69, signed by the governor on March 14, 2024.

Virginia

In January, Virginia published Public Document No. 24-1, which provides additional guidance around the state’s PTET legislation enacted in 2022 and 2023. The guidance addresses eligibility for the PTET, procedures for making the election, estimated payment guidelines and other compliance-related issues.

Virginia’s PTET legislation provides for a retroactive election opportunity for the 2021 tax year. In February of this year, Virginia released Public Document No. 24-12, which provides additional guidance on making the retroactive PTET election for 2021. To make an election for the 2021 tax year, an eligible PTE must submit a 2021 Form 502PTET using Virginia’s Business Online Services system on or before September 16, 2024, and must make all payments electronically either before or at the time of the return submission. The guidance also clarifies how owners of a PTE making a retroactive election may claim a retroactive 2021 PTET credit on their individual or fiduciary income tax returns.

Takeaways

The analysis around the impacts of PTET elections remains complex, particularly as states continue to change or clarify their rules on these tax regimes. Each state that has a PTET regime has unique rules related to the computation of taxable income at the entity level and the treatment of electing pass-through entity owners. Not all owners of pass-through entities may benefit from PTET elections, depending on their state of residence and the facts that apply to their individual tax situation. It is important to perform a thorough analysis addressing all aspects of PTET elections and the impact to the pass-through entity owners before making a decision to elect into one of these regimes.

If you have any questions on the rule changes noted in this article or how PTET elections may impact your business, please contact your Frazier & Deeter tax advisor or Brian Strahle, Partner, National Practice Leader – State and Local Tax, at brian.strahle@frazierdeeter.com.

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Brian Strahle, Partner, National Practice Leader – State and Local Tax

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