One of the poison pills included in the proposed tax legislation currently being argued in both Houses of Congress would eliminate the ability of S Corp and Partnership Owners to claim the Pass Through Entity Tax Credit (PTETC). This is one of the smaller details that isn’t being reported by any of the major news outlets.
But this one change, in the more than eleven hundred page document, could have large and far reaching tax consequences for most entrepreneurs.
Instead of allowing the credit, the State And Local Tax (SALT) Limitation would still be in place. Under the current legislation, that limit would be raised on a Married Filing Joint Return from $10,000 annually to $30,000. Those limits would be half of that amount for single taxpayers.
In order to explain the difference, let’s use an example. Joanne B. Owner has an S Corp and is a Married Filing Joint Taxpayer.
Her business does $1.5M per year. She takes out a $75K salary and a $300K distribution. She pays a 5% state income tax on her salary and distribution and pays another $20K annually for her property taxes.
In 2024, we were able to claim a PTETC amounting to 6.5% of her distribution or $19,500 on her returns. This reduced both her federal and state income tax liabilities a total of $4,875, assuming that her combined average income tax rate is 25%, by paying in the state income tax liability with her entity return.
If the current law is enacted, that will no longer be possible. In addition, the 5% she pays on her W-2 and Distribution Amounts will be $18,750 in state income tax. When we add in the $20,000 she pays in property tax, she’ll have a total state tax load of $38,750.
But only $30,000 of that would be deductible. She’ll lose the credit at the Federal and State Level in addition to losing another $8,750 deduction on her Schedule A.
Her combined income tax load would increase by $13,625. On a $375K 1040, that’s more than a 3.6% increase in her taxes.
Let me leave you with this…
There are many parts of this bill that are controversial. Whether it will pass or not, is anyone’s guess at this point.
But this one change, depending on your individual circumstances, could be devastating.
We’re only talking about a $300,000 K-1. What would happen if yours was much larger? What would happen if the property taxes you pay on your primary and vacation home are larger than $20K.
Again, this could become a real problem.
This isn’t a political statement. I’m not trying to say whether I agree or disagree with this change.
The fact that the IRS has allowed these PTETC’s in the first place has always been a question for Tax Geeks like me. We waited for them to send out a regulation banning them, because the credit allows an additional deduction at the Federal Level as well, that never came.
So, in retrospect, I guess that many of us could have seen this coming.
But this is a major change that no one is discussing. As such, this or something like it, will probably be included in the final legislative measure.
I just thought that someone should start talking about it so that Entrepreneurs could begin thinking through the implications and how it would change their overall tax burdens if passed.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
www.SalarySolutions.net
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