What is “pass-through entity?”
“A [pass-through] entity is a legal business entity that passes any income it makes straight to its owners, shareholders, or investors [such as a Partnership or S Corporation]. As a result, only these individuals—and not the entity itself— are taxed on the revenues. [Pass-through] entities are a common device used to avoid double taxation, which happens with income from regular [C] Corporations.” Click here to learn more.
What is the pass-through entity tax?
“Gov. Eric Holcomb signed Senate Enrolled Act 2 into law Feb. 22, 2023, authorizing certain pass-through entities to voluntarily elect to pay tax at the entity level based on each owner’s total share of adjusted gross income. It is retroactively effective for taxable years beginning on or after Jan. 1, 2022.”
The bill allows the business to pay the state tax on the owner’s share of the profits. The owner will still report the income on their personal tax return, but they will receive credit for the payments made on their behalf. Additionally, this change seeks to provide tax relief to Indiana small businesses by allowing them to receive an unlimited federal deduction for state tax payments for the owner, thus lowering the company’s taxable income. Click here to learn more.
Qualified entities include:
• Partnerships
• S corporations
• LLCs taxed as S-corporations or partnerships
Entities not included:
• C corporations
• Trusts
• Sole proprietorships
• LLCs taxed as C corporations for federal tax purposes
• Single member LLCs disregarded for federal tax purposes
• Qualified subchapter S subsidiaries
This new legislation allows qualified business owners to receive the benefits of state deductions for more than the federal $10,000 cap. If your net income is over $50,000 in 2022 or 2023, it may make sense to amend your business tax return. If you need to amend your 2022 or 2023 return due to the PTET, please contact us. Click here to contact us now.
To learn more about whether you qualify for the pass-through entity tax, click here.
Or click here to learn more about our tax planning and preparations services.
Want to learn more?
Here’s another resource to help answer your questions…
House lawmakers relaunch the SALT caucus. Here’s what to know about the $10,000 deduction limit for state and local taxes – CNBC
Blog by Kim Storen, EA – Tax Services Manager
Learn more about Kim and the rest of the Storen Financial team here.