Pass-Through Entity Tax (PTET): Key Considerations Before Making the Election in 2025

As companies close their books on 2024 and shift their focus to tax filings for 2024 and estimates for 2025, many are faced with the decision of whether to elect into the Pass-Through Entity Tax (PTET) regime. Opting in can provide a workaround to the federal cap on the state and local tax (SALT) deduction. However, making this election involves several key considerations, particularly regarding the ability to claim the credit and obtain refunds for excess payments.

It is essential for companies to have a keen understanding of the specific rules in each state and evaluate the following factors prior to making an affirmative election.

• Will you receive a full PTET credit or is it limited under the state’s rules? Most state PTETs allow taxpayers a 100% credit for the respective state’s PTET. However, some states reduce the credit available that a taxpayer can claim to 90% or less. Electing into these PTETs consequentially reduces the net benefit of the SALT workaround.
• How are PTET overpayments treated? For overpayments at the entity level, the general rule is that they will be refunded to the business entity making the payment. However, excess PTET credits at the shareholder/partner level may not always be refunded. Some states require these overpayments to be carried forward for a finite period of years until used up or timed out.
• Are refunds from the PTET subject to federal tax? For federal tax purposes, state tax refunds are often treated as taxable since they are deemed an accession of wealth. While specific IRS guidance has not been issued, there is a likelihood that PTET refunds are on par with other state tax refunds. Consequently, if such refunds are taxed federally, it is important to consider whether or not the PTET is really worthwhile.
• Do resident states allow one to claim a credit for another state’s PTET? In general, states grant residents a credit for taxes paid to other states to eliminate the prospect of double taxing the same income since the home state typically imposes tax on all income of the resident. However, some states do not permit a resident this credit when the taxes are paid by an entity on behalf of a shareholder/partner. In such instances, one may not be able to claim a PTET credit on their resident state return, resulting in an additional tax liability.

While the above are only some of the considerations to be reviewed before electing into the PTET regime, there are many other nuanced items to analyze.  With tax deadlines and election due dates quickly approaching, now is the time to focus on these questions to better assess one’s situation in relation to a PTET saving strategy.

For more information on making the right PTET election decision, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.