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 claim an unlimited federal deduction for state taxes paid by the owner, thereby reducing 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
Navigating Pass-Through Entity (PTE) tax regulations can be complex, and state-specific rules vary significantly. If you live in Indiana, visit the Pass-Through Entity (PTE) tax FAQ page to learn more. If you have questions about whether your business qualifies or how this strategy can lower your federal tax burden, we are here to help. Our ultimate goal is to help you build a strong, vibrant business that continually provides desired results.
If you have any questions, please contact us. Click here for contact info.
To learn more about how to pay Pass-Through Entity (PTE) tax, click here.
Blog by Kim Storen, EA – Senior Tax Accountant
Learn more about Kim and the rest of the Storen Financial team here.