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On Friday my post reminded business owners that there are some great tax savings out there, but it’s important to be aware of what they are and to understand the advantages and limitations.

This excerpt is copied and pasted from my tax research software:  “Pass-through entity-level tax elections pose significant opportunities and risks for pass-through entities and their owners across the states. As of the first of the year, thirty-six states and one locality (New York City) allow pass-through entities to elect to pay income tax at the entity level rather than the partner or shareholder level. Pending legislation in three additional states—Maine, Pennsylvania, and Vermont—would enact an elective pass-through entity level tax. Of the remaining jurisdictions, only Delaware, the District of Columbia, and North Dakota impose a personal income tax on income that flows through to a partner or shareholder from a pass-through entity.”

I tend to be a visual person as well as a #’s cruncher, so I asked ChatGPT to help me create a visual.  AI is not perfect and the spelling is sometimes as awful as mine, they just cannot understand that I am talking about business entities; I know you “get it” and I believe this visual does highlight the amazing benefits of the pass-through entity tax election and deduction, I gave up after 10 tries and settled for this one.  The main point is taking advantage of tax savings strategies so you can realize your goals:

Having a successful business is great, taking advantage of allowable business deductions so that you minimalize your “personal out-of-pocket” tax burden and while saving up to realize your dreams ….🎾🎣⛳🚢🧳🎓

Election limitations and exceptions:  Generally, a state election to pay tax at the entity level can be made by entities treated for federal tax purposes as partnerships (other than publicly traded partnerships) or S corporations; however, many states provide limitations or exceptions to this general rule.

Years election can be made:  In most states, the elective tax is effective indefinitely, but several states limit the election to the tax years in which the federal $10,000 SALT cap applies—meaning that the election is no longer available for tax years beginning on or after January 1, 2026; other states provide that the election provisions are automatically repealed if the federal SALT cap provisions no longer apply. HOWEVER, we tax professionals do expect several tax changes under Trump’s second term and will be watching for extension of the Tax Cuts and Jobs act (TJA) and hence the SALT cap

Differing election forms and mechanics :  Taxpayers should also be aware of the mechanics for making the election. In several states, the election is made on the pass-through entity’s annual return.¹⁸ In other states, a specific election form may be allowed or required.¹⁹ In still others, a pass-through entity will be considered to have made the election simply by paying the pass-through entity level tax.²⁰ Also, states may provide different rules for the year the pass-through entity tax was enacted and for subsequent years, or may allow taxpayers to file amended returns for certain years (and not others) to make or revoke the pass-through entity-level tax election.²¹

Final Thoughts/Recommendations:   Please don’t try this on your own, check with your accounting professional to make sure your timing is right and you have the funds set aside to take advantage of this and other tax benefits.

Feel free to search our website for some of our complementary resources or get in touch:  Contact us if you have tax concerns, tax minimization questions or want to discuss the next steps for your business success and financial goals.  Here is the link to read our blog posts; use our search box for those posts specific to tax minimization and PTET.