Running the numbers first with your tax advisor can help avoid unintended consequences. This, and which method is selected, could result in drastically different taxes and results for the PTE and its owners. In addition, multiple related pass-through entities may file a combined return to determine the tax. Alternative - Taxable income not only includes Connecticut-sourced income but also “unsourced income” (i.e., income that is not taxed in another state), both of which are attributable to only individuals, trusts, and estates.Standard - The entity’s taxable income is based on “Connecticut sourced income” as determined under the personal income tax rules, regardless of who owns the entity.A PTE may annually elect to use the “standard base method” or the “alternative base method.”
It is applicable to S corporations, partnerships, and limited liability companies (LLCs) that are treated as partnerships or S corporations for tax purposes.Ī flat tax rate of 6.99% is imposed on a rather complex calculation of the pass-through’s taxable income. Unlike all states that followed, Connecticut’s PTET is mandatory. It became effective for tax years beginning on or after January 1, 2018. 2021).Ĭonnecticut was the first state to adopt the PTET regime to circumvent the SALT cap, even without the IRS’s blessing that the tax would be considered a valid above-the-line pass-through deduction. Two new states recently addressed a similar tax: Massachusetts (eff. 2020) were leaders in enacting the PTET regime. All states that have the option to pay tax at the entity level are included, and we highlight some important topics that come into play. The summaries below may help taxpayers determine whether each state’s election makes sense for them and their entity. In many states, the entity pays the tax at the same rate as individual taxpayers, yet other states have picked rates that are different. Some states allow residents a credit at the individual level for tax paid by the entity to another state, but others are silent on how the credit for taxes paid will work. Some of the state pass-through entity tax (PTET) elections are mandatory, while others allow each owner to make the election separately. Laws governing these entity-level tax elections vary significantly by state. The IRS approved these elections as a legitimate workaround, which led to a multitude of other states also enacting pass-through entity tax elections. Several states responded to the federal $10,000 state and local tax deduction limit by allowing pass-through entities (PTE) the option of calculating and paying tax at the entity level. Take care always.Not sure if entity-level taxation is right for your business?
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