The Pass-Through Entity Tax (PTET) is a tax planning strategy that high-income California business owners can use to save money on their taxes. By having your business entity pay your state income taxes, you can turn non-deductible state taxes into valuable tax savings. This strategy can be especially beneficial if your household income is higher. The deadline to elect to take the PTET tax deduction in California is June 15, 2024, so it’s important to have proactive tax planning to take advantage of this opportunity.
The PTET is essentially a workaround for the SALT cap imposed by the Trump Tax Plan, which limited tax deductions for state and local taxes to $10,000 annually. This limitation can be particularly burdensome for Californians with high property taxes and state income taxes. By using the PTET strategy, business owners can deduct their state income taxes as business expenses, thereby avoiding the $10,000 SALT cap. This strategy is also beneficial for taxpayers who elect the standard deduction on their personal tax returns.
To take advantage of the PTET tax planning strategy, you need to run your business as a partnership or S Corporation. Publicly traded partnerships are not eligible for the PTET. The annual PTE election must be made on an original, timely filed tax return, and once the election is made, it is irrevocable for the year. The election must be made when filing the tax return for the taxable year, with an initial payment due by June 15 during the tax year.
Tax payments for the PTET must be made within specific time frames and by certain deadlines. Payments must be made by June 15 of the taxable year for the initial payment, with the remaining amount due by the original return deadline. Payments can be made using the Web Pay application or the Pass-Through Entity Elective Tax Payment Voucher. Qualified taxpayers can claim their PTE credit on their personal tax returns.
If you believe you could benefit from the PTET tax planning strategy and your tax professional is not equipped to guide you through the process, it may be time to upgrade to financial professionals who can help you maximize your tax savings. The PTET can provide substantial tax benefits, especially for high-income California residents with significant state income and property taxes. By electing to take the PTET tax deduction and making the required payments on time, you can turn non-deductible state taxes into valuable tax savings.
