The State and Local Tax (SALT) deduction cap, introduced under the 2017 Tax Cuts and Jobs Act, limits the amount of state taxes you can deduct on your federal return. For many pass-through business owners in the Midwest, this can result in a higher federal tax bill.
Fortunately, many states—including Nebraska, Iowa, and others—now offer a solution: Pass-Through Entity Taxes (PTETs). These taxes, paid at the business level, allow owners to get around the SALT cap, potentially resulting in a lower federal tax burden. Here’s a simplified look at how PTETs work and how you can benefit.
What is a PTET?
A PTET is a state-level tax paid directly by a pass-through business—such as an S corporation, partnership, or LLC—instead of by the individual owners. Because the tax is paid at the business level, it becomes a deductible expense for the entity on its federal tax return, allowing owners to avoid the $10,000 SALT deduction limit that applies to individual taxpayers.
PTET Rules in Nebraska, Iowa, and Neighboring States
- Nebraska: Implemented PTET in 2022. Pass-through entities can make an annual election to pay this tax, and owners receive a credit on their Nebraska personal income tax return.
- Iowa: Recently adopted PTET. Iowa’s version allows the business to pay the state tax at the entity level, reducing the owner’s federal taxable income and benefiting both residents and non-residents.
- Wisconsin: Allows partnerships, LLCs, and S corporations to elect PTET. Annual elections are required, and careful planning is needed to meet the state’s deadlines.
- Kansas: Offers a similar PTET structure, with a credit provided to individual owners for the taxes paid at the entity level.
- Illinois and Minnesota: Also have PTET programs, though the rules and credits vary slightly.
Why Does This Matter?
For business owners in states with high state taxes, PTET can result in significant federal tax savings. By making the election to pay taxes at the entity level, owners get a larger federal deduction, potentially reducing their taxable income and overall tax liability. This is especially valuable for owners of profitable pass-through entities in Nebraska, Iowa, and the surrounding states.
How to Take Advantage of PTET
- Check Your Eligibility: Confirm that your business qualifies to elect PTET and determine whether it makes sense for your specific situation.
- Plan Your Election: Each state has different rules and deadlines for making the PTET election, usually by the original tax return due date. It’s essential to act early in the year.
- Coordinate Multi-State Operations: If your business operates in multiple states, ensure that PTET elections are made in each applicable state to avoid paying double taxes.
- Monitor Cash Flow: Because PTET payments are made at the business level, it’s important to factor in these payments when managing cash flow, especially for seasonal or cyclical businesses.
How Our CPA Firm Can Help
Understanding PTET rules and elections can be confusing, but our team of experienced CPAs is here to make it easy. We specialize in helping Midwestern business owners navigate state and federal tax planning opportunities to ensure you’re maximizing your savings.
Our firm can help you:
- Determine if PTET is right for your business.
- Handle the annual elections and compliance requirements.
- Develop a tailored strategy to reduce your overall tax burden.
Ready to Explore PTET for Your Business? Contact Us Today!
If you own a pass-through business in Nebraska, Iowa, or a neighboring Midwestern state, don’t miss out on this opportunity to save on your federal taxes. Contact us today for a consultation, and let’s discuss how PTET can work for you.
We proudly serve clients throughout the Midwest and look forward to helping your business succeed.
