Tax Explainer: How PTE (Pass Through Entity) Tax Saves You Money
Angie M Grainger
Paying your state taxes through your business entity is a luxury you should take advantage of..before it's too late.
Tax Savings Example:
Federal Tax Savings: Assuming a 37% federal tax rate, if you make the $100,000 payment as a PTE payment instead of paying from your own pocket in April, your federal taxable income will be reduced by $100,000 resulting in a tax savings of $37,000 (37% of $100,000).
This is a huge benefit that should not be missed! Every taxpayer in a high-taxed state should be consulting with their tax professional to make sure to maximize this opportunity.
What is Pass-Through Entity (PTE) Tax
PTE Tax is the state tax on your business profits that is now structured so you can get a full deduction on your federal return for your state taxes.
State Tax Limitation on Schedule A: The state and local tax (SALT) deduction used to be a significant benefit for individuals itemizing deductions on Schedule A of their federal returns. This deduction allowed taxpayers to deduct the full amount of their state and local taxes, including income and property taxes, from their federal taxes.
Cap of $10,000: However, with the Tax Cuts and Jobs Act (TCJA) implemented in 2018, a $10,000 cap was introduced on the deduction of state taxes for individuals. This limitation significantly reduced the amount of state and local taxes they could deduct. The $10,000 cap started in tax year 2018 and is applied through the end of 2025.
Impact on High-Tax States: Residents of high-tax states, such as California who traditionally paid higher state income taxes and property taxes, were particularly affected by this limitation.
PTE as an Alternative: Pass-Through Entities tax came about to allow the deduction of state taxes by paying them at the entity level to get a full federal deduction.
Election Required: To be eligible for this deduction you must make the PTE election by the preset due dates. In CA, you would have had to make the election and pay the 1st PTE payment by the election due date in order to be eligible. In December, if the 2nd payment is made by 12/31 it can be fully deducted on the 2023 return for cash basis tax payers.
Contact us today to maximize your tax savings.