A total of 21 states have enacted or are considering legislation that creates a pass-through entity tax as a workaround to the $10,000 cap on the state and local taxes (SALT) itemized deduction.
What is Pass-Through Entity Tax?
The pass-through entity tax (PTE) allows partnerships and S Corporations to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election the partner or shareholder is usually allowed to: (1) Claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the partnership or S Corporation, and (2) Allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return.
States with a Pass-Through Entity Tax
A pass-through entity tax went into effect in the following states before 2022:
- Alabama
- California
- Connecticut
- Idaho
- Illinois
- Louisiana
- Massachusetts
- Maryland
- Minnesota
- New Jersey
- New York
- Rhode Island
- South Carolina
- Wisconsin
States with Pass-Through Entity Tax Starting in 2022
A pass-through entity tax goes into effect in 2022 in the following states:
- Arkansas
- Arizona
- Georgia
- North Carolina
- Oklahoma
- Oregon
States with Pending Legislation
The following states have pending legislation to enact a pass-through entity tax:
- Iowa
- Mississippi
- Ohio
- New Mexico
- Pennsylvania
- Utah
- Virginia
Pass Through Entity Tax Rules by State
Here are brief details as well as where to learn more about the pass-through entity tax rules for the following States that have enacted a pass-through entity tax:
Alabama
- Partnerships and S Corporations may elect to pay a 5% tax on their Alabama taxable income.
- The entity makes the election by submitting Form PTE-E via My Alabama Taxes. This form may be submitted any time during the year, or on or before March 15 of the following year.
- Partners or shareholders are entitled to a refundable credit in an amount equal to their pro rata distributive share of the Alabama income tax paid by the entity.
- Applicable for Tax Years 2021 and later.
See the Alabama Electing Pass-Through Entity Tax Guidance page on the Alabama Department of Revenue website for more information.
Arkansas
- Partnerships, S Corporations, or a limited liability company with one or more members may elect to pay a 5.9% flat tax on their net Arkansas business taxable income.
- The election must be made on an annual basis and must be approved by business owners holding more than 50% of the voting rights in the business.
- An entity makes the election by completing and filing Form AR362 (Arkansas Pass-Through Entity Income Tax Election or Revocation Form).
- Applicable for Tax Years 2022 and later.
For more information, see the Pass-Through Entity Tax: FAQs on the Arkansas Department of Finance and Administration’s website.
Arizona
- Partnerships and S Corporations may elect to pay a 4.5% flat tax on their Arizona business taxable income.
- The election must be made on an annual basis. Partners or shareholders may opt-out of the election.
- Partners or Shareholders are allowed to claim a Credit for Entity Level Income Tax on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to a partner’s or shareholder’s share of income taxable in Arizona.
- Applicable for Tax Years 2022 and later.
For more information, see the Senate Fact Sheet for HB 2838 on the Arizona website.
California
- Partnerships, S Corporations, and LLCs taxed as partnerships may elect to pay a 9.3% tax on each consenting partner’s or shareholder’s pro-rata share of the entity’s income subject to tax in California.
- The election is made on the entity’s timely filed tax return.
- If entity makes the election, the individual partners or shareholders can choose not to have their income included in the calculation of pass-through entity tax.
- Partners or Shareholders that consent to the election are eligible to claim a nonrefundable credit for the amount of tax paid on their pro rata or distributive share and guaranteed payments included in the entity’s qualified net income. Unused credits can be carried over for up to 5 years.
- Applicable for Tax Years 2021 and later.
For more information, see the Pass-through entity (PTE) elective tax page on the California Franchise Tax Board’s website.
Colorado
- Partnerships, S Corporations, and LLCs taxed as partnerships or S Corporations may elect to pay a 4.55% flat tax on their Colorado business taxable income.
- The election must be made on an annual basis and it is binding on all of the pass-through entity’s owners. The election is made by checking a box on the entity’s applicable Colorado state income tax return.
- Applicable for Tax Years 2022 and later.
For more information, see Colorado House Bill 21-1327 on the Colorado website.
Connecticut
- All pass-through entities are subject to the pass-through entity tax.
- Tax is calculated by one of two methods. The Standard Base is the default method. An entity may elect to use the Alternative Base method. The tax rate applied to the applicable base is 6.99%.
- Partners may claim a PE Tax credit on their personal income tax return. This credit is a refundable credit.
- Applicable for Tax Years 2018 and later.
For more information, see the following on the Connecticut Department of Revenue Services website:
- Pass-Through Entity Tax
- Connecticut Publication OCG-6 (Regarding the Calculation of the Pass-Through Entity Tax)
- Connecticut Publication OCG-7 (Regarding the Pass-Through Entity Tax Credit)
Georgia
- Partnerships and S Corporations may elect to pay a 5.75% tax on their Georgia business income.
- Entity can make the election by checking a box and completing the applicable schedules for Form 600S for S Corporations or Form 700 for partnerships.
- Applicable for Tax Years 2022 and later.
For more information, see Rule 560-7-3-.03 Election to Pay Tax at the Pass-Through Entity Level on the Georgia Department of Revenue’s website.
Idaho
- Partnerships, S Corporations, and LLCs taxed as partnerships may elect and pay a 6.5% tax on the distributive share of their Idaho taxable income.
- The election is made on the entity’s timely filed return. All partners or shareholders must agree.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information see the More SALT Guidance page on the Idaho State Tax Commission’s website.
Illinois
- Partnerships and S Corporations may elect to pay a 4.95% tax on their Illinois tax income.
- The election is made on the entity’s Illinois income tax return.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 through 2025.
For more information, see the following on the Illinois Department of Revenue’s website:
Louisiana
- Entity may elect to be taxed as if they were a C Corporation on their Louisiana taxable income.
- The election is made by filing Form R-6980 with the Louisiana Department of Revenue. The election is in effect for the year the election is made and all succeeding tax years until it is revoked. Owners holding more than 50% ownership must approve the election.
- Applicable for Tax Years 2019 and later.
For more information, see Revenue Information Bulletin No. 19-019 – Guidance on Pass-Through Entity Election on the Louisiana Department of Revenue website.
Maryland
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay an 8% tax on their Maryland taxable income for its members who are individuals. The rate is 8.25% for their corporate members.
- The electing entity must file Form 511 (Pass-Through Entity Election Income Tax Return).
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable to Tax Years 2020 and later.
For more information, see the following on the Comptroller of Maryland’s website:
Massachusetts
- Partnerships, S Corporations, and LLCs taxed as a partnership or S Corporation may elect to be taxed at 5% of their Massachusetts taxable income.
- The election must be made by the entity using Form 63D-ELT. This form must be filed electronically along with their tax return.
- Each resident partner or shareholder is allowed a credit of 90% their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information, see the Elective pass-through entity excise page on the Massachusetts Department of Revenue website.
Minnesota
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 9.85% tax on the entity’s Minnesota taxable income.
- The election is made by completing Schedule PTE (Pass-Through Entity Tax).
- Partners or shareholders may claim a refundable credit that is equal to the PTE tax paid by the entity on their behalf.
- Applicable for Tax Years 2021 and later.
For more information see the Pass-Through Entity (PTE) Tax page on the Minnesota Department of Revenue website.
New Jersey
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay a pass-through business alternative income tax that is due on the sum of each member’s share of distributive New Jersey income.
- Tax rate is on a graduated rate as follows:
- 5.675% of first $250,000
- 6.52% of income between $250,001 and $1 million
- 9.12% of income between $1 million and $5 million
- 10.9% of income over $5 million
- The entity makes the election by first registering with New Jersey Division of Revenue and Enterprise Services and then submitting election form via the NJ Pass-Through Business Alternative Income Tax Online Filing and Payments tool on their website.
- Applicable for Tax Years 2020 and later.
See the Pass Through Business Alternative Income Tax Act page on the New Jersey Division of Taxation website.
New York
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay a tax based on their New York taxable income. The tax ranges from 6.85% if the taxable income is $2 million or less to a high of 10.90% if the taxable income is above $25 million.
- The entity makes the election online via their Business Online Services account.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information, see the following on the New York State Department Taxation and Finance’s website:
North Carolina
- Partnerships and S Corporations may elect to pay a 4.99% flat tax on their North Carolina business taxable income.
- Partnerships may only make the election if all of their partners are individuals, estates, trusts, or certain exempt organizations.
- An entity can make the election on their North Carolina income tax return.
- The election must be made on an annual basis.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2022 and later.
For more information see North Carolina S.B. 105 pages 594 – 599.
Oklahoma
- Partnerships and S Corporations can elect to be taxed at 5% for individual owners and 6% for corporate owners of the entity.
- The entity makes the election by completing and filing Form 586 (Pass-Through Entity Election). The election is binding until revoked.
- The partners or shareholders subtract any item of gain or add any item of loss that was allocated to them for federal tax purposes to their federal adjusted gross income on their Oklahoma return.
- Applicable for Tax Years 2022 and later.
For more information, see page 7 of the 2021 Oklahoma Small Business Corporation Income and Franchise Tax Forms and Instructions (Form 512-S) on the Oklahoma Tax Commissions website.
Oregon
- S Corporations and partnerships may elect to pay a tax (Oregon PTE-E tax) on their Oregon business taxable income. The tax is at 9% on the first $250,000 and 9.9% on taxable business income above $250,000.
- Shareholders and partners are eligible for a credit on their individual Oregon returns equal to 100% of the member’s distributive share of pass-through entity tax paid.
- Applicable for Tax Years 2022 and later.
For more information, see the Pass-Through Entity – Elective Tax FAQs on the Oregon Department of Revenue’s website.
Rhode Island
- Partnerships, S Corporations, LLCs and sole proprietors may elect to be taxed at 5.99% of their Rhode Island net business income.
- The entity makes the election by filing Form RI-PTE (Pass-through Entity Election Tax Return).
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable to Tax Years 2019 and later.
For more information, see the following on the Rhode Island Division of Taxation’s website:
South Carolina
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 3% tax on the entity’s active trade or business South Carolina taxable income.
- Entity makes the election by filing Form I-435 (Active Trade or Business Income for Electing Partnerships and S Corporations).
- Applicable to Tax Years 2021 and later.
For more information, see SC Revenue Ruling #21-15 on the South Carolina Department of Revenue’s website.
Wisconsin
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 7.9% tax on the entity’s Wisconsin taxable income.
- Members who hold more than 50% of the entity’s ownership must consent to the election. Election applies to all partners and shareholders.
- The entity makes the election by checking a box on Form 3 or Form 5S. The entity must also complete Schedule 3-ET or Schedule 5S-ET to calculate the entity level tax.
- Applicable for Tax Years 2019 and later.
For more information, see the following on the Wisconsin Department of Revenue’s website:
- Pass-Through Entity Level Tax: Partnership Determining Income and Computing Tax FAQs
- Pass-Through Entity Level Tax: Tax-Option (S) Corporation Determining Income and Computing Tax FAQs
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