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Choice matters with pass-through entity income tax elections

October 25, 2022 / 5 min read

Because state statutes can be inconsistent when determining the tax base for resident and nonresident owners, determining eligibility for pass-through entity tax benefits requires careful analysis of a variety of factors.

A majority of states enacted pass-through entity tax laws, allowing partnerships and S corporations to elect to pay state income taxes at the entity level that are deducted from federal taxable income earned by pass-through entity owners. Depending on whether the PTE is a partnership or S corporation, a PTET statute could provide a greater tax benefit.

State statutes aren’t always consistent when determining the tax base for resident and nonresident owners, and they may differ further when it comes to what owners are eligible to receive PTET deduction benefits.

Due to the varying rules imposed by the states, there could be significant tax consequences at both the federal and state level, depending on the residency of the PTE owners combined with language contained within the PTE’s legal documents.

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