Pass-Through Entity Tax Payment Deduction

The Tax Cuts & Jobs Act of 2017 (TCJA) capped the deduction of state and local taxes at $10,000 for tax years 2018-2025. This most affected the states that have high property taxes, in that, if you paid $15,000 in property taxes for the year, you could only deduct up to $10,000 on your personal tax return. In response to this provision, 30 states plus NYC have enacted the Pass-Through Entity Tax Payment (PTET) deduction in states that impose a state income tax.

The PTET provision allows for the business owner’s state taxes to be paid from the business, which then provides a deduction for federal tax purposes. This only applies to entities that have flow-through income; meaning, instead of paying federal taxes at the entity level, they flow through to the individual via a K-1. The amount that can be paid from the business depends on the state (each state has its own set of rules) and the entity type (Partnership, S Corp) that is making the payment.

If the business owner resides in the state the business is operating out of, and the state has enacted the PTET, then the process is pretty straightforward. The process and calculation is more complex when the taxpayer resides in one state, and the business is operated out of another. Nevertheless, this could provide substantial tax savings for those in higher income tax brackets.

The link below provides a brief overview of how and why the provision was enacted. It also lists the states that have enacted or proposed PTET payments with their effective year. Please meet with a tax professional who is familiar with your state income tax laws for more info on the PTET.