On Feb. 22, Indiana Gov. Eric Holcomb signed Senate Bill 2, which allows a qualified entity to make an annual PTE tax election for tax years beginning on or after Jan. 1, 2022. The legislation is consistent with the requirements for deductibility as outlined in IRS Notice 2020-75 and is intended to allow owners of qualified entities to get the benefit of deducting state taxes in excess of the current $10,000 limitation for federal income tax purposes.
Qualified entities include limited partnerships, limited liability partnerships, limited liability companies taxed as partnerships, and S corporations. No restrictions exist on the types of owners that qualify under the election except that financial institutions cannot be included in the computation. Electing entities that make the irrevocable annual election agree to pay a net income tax on behalf of all of their owners. The owners can claim a refundable credit equal to their share of the tax. The tax is computed at the individual income tax rate in effect on the last day of the PTE’s tax year on the PTE’s adjusted gross income – Indiana local taxes are not included. The adjusted gross income of the electing entity is the aggregate of the owners’ share of the electing entity’s adjusted gross income. For this purpose, the nonresident owners’ share is computed after allocation and apportionment. The entity may elect to compute the share of resident owners before or after allocation and apportionment but must use the same method for all resident owners. S corporations with Indiana resident and nonresident shareholders should carefully consider the impact of this election.
For tax years beginning on or after Jan. 1, 2022, and before Jan. 1, 2023, the election may be made on an original return filed after March 31, 2023, and before Aug. 31, 2024. If the entity files an original return without the election on or before April 18, 2023, the election may be made on an amended return. Interest and penalties are waived for PTE tax that is paid by Aug. 31, 2024.
The Indiana Department of Revenue is expected to issue guidance soon to clarify how a qualified entity will make the PTE tax election and how to report the tax using existing tax forms.
For tax years beginning on or after Jan. 1, 2023, the election may be made during the tax year or on a timely filed return.
Estimated payments are not required for tax years ending before July 1, 2023. Estimated payments are required for tax years ending after June 30, 2023, in the same manner as for corporate taxpayers. Penalties will not apply for tax years ending before Jan. 1, 2024, if the estimated tax paid equals or exceeds 50% of the PTE tax liability. For later tax years, the threshold increases to 80%.
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