Monthly Insights for Pass-Through Entity Tax: August 2023
Pass-through entity taxes (PTET) are constantly changing on a state-by-state basis. To help our clients keep up with the latest PTET election news, please see our monthly PTET election updates.
The Alabama Department of Revenue announced that an extension of the tax year 2022 PTET election due date will be provided for certain pass-through entities (PTEs) that may have intended to elect, but did not execute, a valid election by the original due date.
How Alabama’s PTET Works
Alabama’s PTET election is made by submitting Form PTE-E via “My Alabama Taxes” on or before the 15th day of the third month following the close of the tax year. PTEs are allowed to make the election in “My Alabama Taxes” through the six-month extension period in the following circumstances:
- PTE did not elect in time, but timely filed their Alabama return as if it had been properly made
- PTE made PTET-estimated or extension payments, but did not elect before the due date
This due date is September 15, 2023, for calendar year taxpayers. The Alabama Department of Revenue will recognize elections timely made by eligible entities in the extension period as validly made by the due date for the 2022 tax year.
The Hawaii Department of Taxation issued Tax Information Release Notice 2023-01. This notice proposed temporary regulations and guidance on the Hawaii’s PTET election and tax credit, which is available starting in the 2023 tax year.
The Iowa Department of Revenue published guidance on their PTET election, which was enacted on May 11, 2023, but retroactive to tax years beginning on or after January 1, 2022. The guidance explains:
- The manner and due dates for the PTE to make the election
- The processes to compute the PTET
- The processes to make payments of PTET
- The information on filing returns for electing entities
In addition, an explanation is provided for the procedure in which owners of an electing PTE claim their PTET credits on their Iowa personal, fiduciary and business entity income tax returns.
Louisiana House Bill No. 428 was recently signed into law, providing two technical modifications to the state’s PTET election applicable to taxable years beginning on or after January 1, 2023. First, the income exclusion for owners of an electing PTE has been extended to trusts, estates and partnerships. Previously, exclusions were only available to individual shareholders, partners or members of an electing PTE. Second, the legislation authorizes electing PTEs to automatically terminate their election.
The Louisiana PTET election is effective for the tax year made, and succeeding tax years until terminated. Prior to the legislation, PTEs had to apply to the Secretary of the Department of Revenue to terminate the election via a private letter ruling request. House Bill No. 428 allows PTEs to unilaterally terminate their election effective the tax year following submission if filed by November 1st (for calendar-year filers). It will be prohibited from making election status changes for the following five tax years.
The Minnesota Department of Revenue issued a 2023 Legislative Session summary of Tax Law Changes, including changes to Minnesota’s PTET effective for the 2023 tax year that were enacted as part of the state’s omnibus tax bill, House File No. 1938. Among the changes to Minnesota’s PTET effective for the 2023 tax year was an expansion of qualifying entities that could participate in the election.
Qualifying entities are able to participate by removing the previous eligibility requirement prohibiting a partnership, limited liability company (other than a disregarded entity) or a corporation as a partner, member or shareholder. Additionally, the bill allows a resident qualifying owner’s 100% share of income from the PTE to be included in the PTET base of income. Previously, the PTET was computed on the entity’s Minnesota-source income for both resident and non-resident qualifying owners.
Ohio’s Fiscal Year 2024-2025 budget bill was recently signed into law. The legislation enacted many tax law changes, among them a measure of relief from double taxation for Ohio resident owners of PTEs that made PTET elections in other states.
In 2022, Ohio enacted their own elective entity-level PTET, permitting owners a refundable tax credit for their proportional share of Ohio’s PTET paid by the entity. The legislation establishing Ohio’s PTET did not amend existing law to allow Ohio resident owners of a PTET to claim a credit for taxes paid to other states where the entity made elections and paid entity-level tax.
Under this legislation, Ohio Rev. Code Section 5747.05 was amended to allow Ohio resident PTE owners to claim the credit for their share of PTET paid to other states that are similar to Ohio’s PTET. Ohio does require an add-back for PTET deducted in the computation of the individual’s Federal adjusted gross income. The amendment allowing the credit is applicable to tax years ending on or after January 1, 2023, but taxpayers have the option to apply the amendments retroactively to tax years ending on or after January 1, 2022 with the filing of an amended or original return to claim the credit.