Since the Tax Cuts and Jobs Act in 2017, the states have been trying to work around the reduced amount of state taxes of $10,000 allowed to be deducted on a personal tax return.
The state strategy essentially allows a deduction for state income taxes above the $10,000 limitation. And if conditions are right, the result can be the reduced federal taxes, and who doesn’t love that!
Every state has handled this issue differently. In Arizona, we passed bill 2838, referred to as the SALT Cap Workaround, which allows pass-through entities to lower their federal taxable income and thus state taxable income by electing to pay the owner’s share of AZ tax at the business level.
- Only available to partners/owners who are individuals, estates or trust that can elect to pay the entity-level tax on their share of income.
- The portion of PTE income that is not attributed to a partner/owner who is not an individual, estate or trust (or who opts out) is not included in the entity-level tax.
- The credit on the individual level is non-refundable but can be carried forward 5 years.
- The entity must notify all partners/owners of intent to make the PTE election then give them 60 days to opt out of the election. See notice below to send to partners/owners.
The Company is looking to make the election to be treated as a PTET for AZ and that you, as a shareholder or partner, have the option to opt out of the election. You have 60 days to respond that you opt out or waive your right to opt out. If the Company doesn’t hear back from you after the 60 days, then you are included in the election.
As straightforward as it sounds, it really is far from it – each state is different. A complete evaluation is required to determine the net tax benefits. As always, please reach out if you have any questions!