The AICPA State and Local Tax Technical Resource Panel (SALT TRP) continues to see states moving ahead with adopting and implementing new passthrough entity taxes (PTETs). States are enacting 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 enacted by the law known as the Tax Cuts and Jobs Act, P.L. 115-97 (Sec. 164(b)(6)).
A PTET is a state or other jurisdiction's mandatory or elective entity-level income tax on partnerships and/or S corporations. Under 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 May 31, 2023, 35 states and one locality had enacted a PTET, including six states in 2023, in four of which a PTET is effective retroactively to 2022 — Indiana; Iowa (with its Department of Revenue on May 22, 2023, requesting comments on needed guidance by June 7, 2023); Kentucky; and West Virginia — while Montana's PTET is effective in 2023 and Nebraska's PTET is effective retroactively to 2018.
In addition, five states have proposed PTE tax bills in 2023. These include two states in which a bill passed the legislature and is awaiting the governor's signature as of May 25, 2023: (Hawaii (2023 effective)). Two other states recently introduced bills (Maine and Pennsylvania). In addition, the state Senate in Vermont passed a bill that is now being considered in the House.
So far in 2023, PTET modification bills have been enacted in four states (Georgia, Kentucky, New Mexico, and North Carolina) and introduced in five other states (Minnesota, Mississippi, New York, Oregon, and Virginia). A common modification is to expand eligibility for partnerships with entities as partners.
Regarding the federal rules, the AICPA SALT Deduction PTET Task Force 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 vs. nonpassive income and interest tracing; on Oct. 4, 2022, regarding accrual-basis taxpayers; and on Oct. 26, 2021, regarding S corporation issues.
The SALT TRP continues to assist state societies on this issue with our many AICPA state tax advocacy resources, including a map, a links list to states' legislation and guidance, and a list of taxpayer and practitioner considerations on electing into a PTET.
— Eileen Reichenberg Sherr, CPA, CGMA, MT, is director–Tax Policy & Advocacy and staff liaison to the SALT TRP with AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.