The House Version of the One Big Beautiful Bill Act (OBBBA) included a specific provision negating Pass Through Entity Tax Credits (PTETC). But the Senate Version revived these important credits and the bill was signed into law last week.
In order to explain how this works, let’s use an example.
Joanne B. Owner owns a profitable S Corp. She takes a $100K W-2, has another $500K in K-1 earnings, and pays $30K annually in property taxes on her home in Lake County, Illinois.
She pays a 4.95% income tax in Illinois, so the state taxes on her W-2 and K-1 income will be $29,700. When we add in the $30,000 she pays for property taxes, her State and Local Taxes (SALT) will be $59,700 in 2025.
Given the $40,000 SALT Cap she would normally lose $19,700 in deductions, but her income is over $600,000. The new SALT Cap has a rapid phaseout between incomes of $500K and $600K, so her SALT Cap will go down to only $10,000.
Joanne just lost a $49,700 deduction. At a combined Federal and State Income Tax Rate of 30%, that will cost her another $14,910 in taxes.
But what would happen if she employed the Pass Through Entity Tax Credit?
This allows her to pay the 4.95% State Income Tax she would pay on her K-1 income at the entity level rather than with her personal return. She can also get a deduction for that tax payment on her Federal and State S Corp Return.
So she pays the tax which comes to $24,750, and takes the deduction, which will save her $7,425 in taxes this year alone.
Let me leave you with this…
36 states have passed a version of the PTETC. Our version in Illinois is one of the most ridiculous pieces of legislation I’ve ever read because it’s impossible to do correctly.
It requires business owners to make four equal quarterly estimated tax deposits inside the year where they’re earning the money. How does anyone know in April of 2025 how much they’re going to make by December 31st of the same year?
You have a good first quarter so we set the quarterly estimated tax based on a projection of income for the entire year. Then something happens and your second quarter numbers drop 30%. What do you do?
Again, there’s no way to comply with the law accurately.
As such there are usually penalties when employing these credits. I’m almost sure that our legislature wrote the law in this manner specifically so they could collect additional revenues.
It’s to be expected, but the penalties are small in comparison to the tax savings. So if you’re going to be profitable this year, this may be something we should look at.
Let me know…
This is the second column in my series on tax planning for entrepreneurs given the new law.
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