Recent developments in states’ PTETs

In this follow-up to prior articles and State & Local Taxes columns in The Tax Adviser,1 the AICPA State and Local Tax Technical Resource Panel (SALT TRP) continues to monitor and track the states adopting and implementing new passthrough entity taxes (PTETs).  States are enacting and implementing these laws as a workaround to the $10,000 cap on the federal deduction for state and local taxes for tax years 2018 through 2025 (SALT cap), enacted by the law known as the Tax Cuts and Jobs Act.2

A PTET is a state or other jurisdiction’s elective (or mandatory) entity-level income tax on partnerships or S corporations.  In Notice 2020-75, the IRS stated that the payment of a PTET to domestic jurisdictions is deductible in computing the entity’s nonseparately stated income or loss and is not taken into account in applying the cap to an individual partner or shareholder in the entity.

As of July 9, 2024, 36 states (and one locality) had enacted a PTET intended to meet the requirements of Notice 2020-75.  In addition, three states had PTET bills proposed during 2024 legislative sessions:

• Maine Legislative Document 1891 was a PTET bill carried over from the 2023 session.  After testimony and discussion, the bill was amended to instead be a study bill and was enacted on April 16, 2024.
• Pennsylvania S.B. 659, which was also a bill carried over from 2023, originally included a PTET, including in the version that was passed out of the State Senate Finance Committee on March 20, 2024, and re-referred to the Appropriations Committee on April 8, 2024, but on July 11, 2024, S.B. 654 (the budget bill) was enacted without a PTET.  The proposed PTET legislation will likely be considered again in 2025.
• Vermont S.B. 45 passed the State Senate and was referred to the State House Committee on Ways and Means; the 2024 session ended on May 12, 2024, without enactment. For the time being, there is no PTET bill under consideration in Vermont.

Delaware and North Dakota are the only remaining states with a personal income tax not to have yet legislatively considered a PTET.  In addition, the District of Columbia’s DC Tax Revision Commission’s recommendations were released on Jan. 5, 2024, and included a proposed PTET, but no formal bill has yet been proposed.

Many of the PTET statutes as originally enacted have been amended over the years.  Connecticut’s PTET as enacted was mandatory but was amended to be elective in 2023 (beginning with 2024 tax years).  A number of states have changed tax rates, changed credit mechanisms, or expanded application of the PTET.

So far in 2024 (as of July 9), PTET modification bills had been introduced in eight states, five of which have been enacted:

• Alabama (H.B. 187, enacted April 26, 2024); 
• Oklahoma (H.B. 3559, enacted April 29, 2024);
• North Carolina (S.  508, enacted May 15, 2024);
• Hawaii (S.B. 2725, enacted June 20, 2024) ; and
• Missouri (H.B. 1912, enacted July 9, 2024). Three states continued their consideration of PTET modification bills:
• California (S.B. 1192 and S.B. 1501) (proposed);
• New York (A.  8451 and S. 8115) (proposed); and Kansas (H.B. 2465) (enacted, but with PTET modification provisions eliminated).

While Notice 2020-75 provided some welcome guidance, it left many questions unanswered.  The AICPA SALT Deduction PTET Task Force has developed and submitted comments to the IRS on the need for guidance on the federal deduction for state and local taxes and the PTET, including on March 6, 2023, regarding Sec.  469 and Sec.  163 passive versus nonpassive income and interest tracing; on Oct. 4, 2022, regarding accrualbasis taxpayers; and on Oct. 26, 2021, regarding S corporation issues.

The AICPA SALT Deduction PTET Task Force also recently developed frequently asked questions on the federal taxation of state income tax refunds for PTET payments as a resource tool for AICPA Tax Section members on this issue.

These include:

• How is a partner’s or shareholder’s state income tax refund based on a PTET credit treated for federal income tax purposes?
• How is a state income tax refund of PTET received by a passthrough entity that made a PTET election treated for federal income tax purposes?
• If a state tax refund of PTET is not reported to a taxpayer on a Form 1099-G, Certain Government Payments, is it still taxable?
• How should a partner or shareholder determine the federal income tax treatment of a state income tax refund generated from an amended return and/or retroactive PTET election?

The SALT TRP continues to assist state societies on this issue with our many AICPA state tax advocacy resources, including a map (with effective years) and a list of taxpayer and practitioner considerations on electing into a PTET.

The SALT TRP also continuously updates a links list of states’ legislation and guidance as states adopt PTETs. This list provides implementation guidance and helpful discussion of issues and nuances among the states. The list covers each state and provides links and information on:

• Legislation (including effective dates);
• Information and guidance;
• Restrictions on owners;
• Owner treatment;
• Credit for other statesf PTETs;
• PTET tax rates;
• Whether nonresidents are required to file if the PTET is elected and they have no other income from the state; and
• Applicable years.

Other AICPA Tax Section resources that are available to Tax Section members include the AICPA SALT Roadmap and Resource Center, which contains PTET information and links for each state, as well as AICPA Tax Section Odyssey podcast episodes: “When to Call an Audible on the Passthrough Entity Tax” (Sept.  30, 2023) and “State Implications With the PTE Tax” (March 23, 2022).

Contributors 

Brian Myers, CPA, is chair of the AICPA State and Local Tax Technical Resource Panel, and Eileen Reichenberg Sherr, CPA, CGMA, MT, is AICPA director–Tax Policy and Advocacy and staff liaison to the panel. For more information about this column, contact thetaxadviser@aicpa.org.