Another way for owners of Pass Through Entities like S Corps or Partnerships to save a substantial amount of tax dollars is through the Pass Through Entity Tax Credit or PTETC. Multiple versions of these laws have been passed in Illinois and another 35 states.
It eliminates the State and Local Tax (SALT) Limitation on Schedule A of your 1040. In order to describe how it works, let’s use an example.
Joanne B. Owner owns an Illinois S Corp with K-1 income of $250K. She also pays property taxes of $5K annually and other state income taxes of $7K on her W-2. The 4.95% income tax that Joanne pays at the personal level for her $250K in S Corp income accounts for another $12,375.
Her total for SALT deduction would be $24,375, but only $10,000 of this is deductible, because State and Local Tax Deductions were limited to $10K back in 2017. This leaves over $14K on the table as non-deductible expenses.
The Pass Through Entity Tax Credit allows us to pay the $12,375 S Corp Tax at the S Corp level. This effectively bypasses the limitation and gives Joanne a deduction at both the Federal and State Level that would normally be missed.
If Joanne is in the 35% income tax bracket at the Federal level and the standard 4.95% for the State of Illinois, using this bypass will save her $4,944 in taxes this year alone.
That’s not nothing.
Let me leave you with this.
I wrote a couple of columns about this credit earlier this year and didn’t raise a lot of interest. At the time there were 11 conservative congressmen from higher property tax states threatening to hold up the budget process if the SALT Limitation wasn’t eliminated. Given the shenanigans that have occurred in Congress since then and our lawmakers inability to get anything accomplished, I doubt that anything will be done about the limitation this year.
As such, I would encourage as many of you as possible to take advantage of this credit while you still can.
December is coming, and with it comes Tax Planning Season. Just in case you can’t tell, in order to get all of you ready for our tax planning sessions, I’m writing a series of articles that will introduce you to the tax reduction avenues currently at our disposal.
Last Friday, I wrote about the ability for Pass Through Entity Owners to now get a full deduction for their Health Insurance expenses. Today was the PTETC. The series will continue.
In order for me to do your tax planning, I’ll need to have a nailed down set of financials for November of 2023. I can’t give decent tax advice without having an idea where you are from a profitability standpoint. If your work isn’t current, please send it in today.
If you would like to take advantage of the Pass Through Entity Tax Credit, then please contact us. We don’t have a lot of time. The tax deposit allowing us to take the credit must be made prior to December 15th, so please let us know.
If your accountant doesn’t do tax planning for you and your entity, then maybe it’s time for a change? Please contact me so that I can provide a complimentary tax reduction session to identify all of the opportunities you’re currently missing.
Next year could be rough. Saving as much money on your taxes might be even more necessary than usual.
We’re all going to get through this. Let’s get through it together.
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