![]() Under the existing law, although a pass-through entity could take a federal income tax deduction for the Illinois elective PET, the owners would pay state income tax in both Illinois and Indiana on the same income. This created double state taxation on the same income (taxed in the other state and Indiana). ![]() In the past, Indiana owners could not take a credit for PET paid to another state against their Indiana personal income tax liability. With or without the election, Indiana resident owners of pass-through entities that file other state returns paying similar PETs to other states can now benefit. Indiana resident credit for PET paid to another state If the nonresident files a personal Indiana return, the nonresident will receive a refundable credit for their share of the PET paid. The PET filing will fulfill a nonresident’s filing requirement if the pass-through entity income is the only income in Indiana. The owners receive a benefit as if they paid the tax.)Ī resident will be required to file a return and claim the refundable credit. (Generally, the owner is not again subject to tax on the income that was already taxed at Company A’s level. To alleviate double Indiana taxation on the same income (tax paid by Company A and again when paid by the resident and nonresident owners when the income passes through to them to be taxed), the owners receive a credit for their share of the tax that was paid by Company A.Īs a refundable credit, if the owner’s PET credit exceeds the owner’s Indiana tax liability, the excess will be refunded. This is the deduction that provides the owners with a federal income tax benefit. Under Option 2, Company A can deduct $1,292. Under Option 1, Company A can deduct $16,796. With respect to resident owners, there is an option to pay the PET on 100% of Company A’s income attributable to the resident owners or only on the Indiana sourced income attributable to the resident owners. For subsequent years, the election must be made by the due date of the pass-through entity’s Indiana tax return.)Ĭompany A pays PET on the nonresident owners’ Indiana-sourced income and on the resident owners’ income. ![]() (For 2022, the PET election must be made between April 1, 2023, and August 30, 2024. The entity level tax is imposed on both the residents’ and nonresidents’ distributive share of income passed out to them. As a result, the owners of Company A receive little to no federal income tax deduction if the taxes are paid without a PET election.īy making the PET election, the tax is imposed directly on Company A and is treated as a deductible state income tax expense of Company A (not a distribution for tax purposes). The resident owners must pay their own tax directly to the state, again subject to the $10,000 limit. The tax that is paid by Company A, as a tax payment on behalf of the nonresident owners, is treated as a distribution to them and is subjected to the $10,000 limit on the nonresident individual owners’ Form 1040. Assume the Indiana apportionment percentage is 4% and the PET rate is 3.23%.Ĭompany A must pay the Indiana income tax “on behalf” of all its nonresident owners (i.e., a composite tax) with respect to Indiana sourced income (i.e., 4% of the company’s income). In this example, assume Company A is a pass-through entity (e.g., partnership or S corporation) and has both Indiana resident and nonresident individual owners, owning 50%/50%. This election provides a significant federal income tax benefit to owners of pass-through entities doing business in Indiana, with essentially no effect on their Indiana personal income tax liability.įollowing is an illustration of the benefits of a PET election. By making the PET regime election, the Indiana income tax expense is moved to the entity level where there is no $10,000 limit.Ī pass-through entity taking the deduction reduces the amount of distributable net income passed through to the owner, so the owner’s federal income taxable income and resulting federal tax liability is, in effect, reduced. This is in reaction to the 2017 federal Tax Cuts and Jobs Act, which limited the state and local tax deduction on individuals’ federal income tax returns to $10,000 a year. As a result of the “retroactive” legislation, pass-through entities with tax years beginning in 2022 and forward may elect Indiana’s PET regime (e.g., for calendar year taxpayers, the election can be made for the 2022 tax return). Indiana recently enacted a bill that allows PET regimes for tax years beginning after December 31, 2021. Indiana has joined 30 other states with a pass-through entity tax (PET) regime in response to the limited state and local tax deduction on individuals’ federal income tax returns. Would Indiana’s New Pass-Through Entity Tax Save Your Company Money?
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