March 3, 2023
Indiana enacts elective passthrough entity tax
On February 22, 2023, Indiana Governor Eric Holcomb signed into law SB 2 (Pub. Law 1), establishing an elective PTE tax, which allows electing entities1 to have adjusted gross income (AGI) tax imposed at the entity level. The PTE tax is intended to enable Indiana taxpayers who are PTE owners to deduct, for federal income tax purposes, state and local taxes exceeding the annual $10,000 deduction limitation imposed by IRC Section 164(b)(6) (the SALT Cap), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690).
Effective for tax years beginning on or after January 1, 2022, a PTE may elect to be taxed at the entity level. (See new code provision Indiana Code Chapter 6-3-2.1.) An authorized person of the electing entity makes the election annually. Once made, the election is irrevocable. The PTE must make the election for a tax year beginning in 2022 after March 31, 2023, and before August 31, 2024. For tax years beginning after December 31, 2022, a PTE must make the election by the earlier of the due date of the electing entity's return for the tax year, including extensions, or the date the electing entity files its return.
The PTE tax is imposed on the electing entity's AGI under Indiana Code Chapters 6-3-1 through 6-3-7, which is the aggregate of the direct owners' share of the electing entity's AGI. Nonresident direct owners' share of AGI is determined after allocation and apportionment under Indiana Code Section 6-3-2-2, while all resident direct owners' share of AGI is determined either before or after allocation and apportionment under Indiana Code Section 6-3-2-2. The same method must be used for all resident direct owners.
Entity owners2 remain liable for AGI tax under Indiana Code Chapters 6-3-1 through 6-3-7 on their share of the electing entity's AGI, while receiving a refundable credit equal to such tax. The PTE tax rate is the same as the rate imposed on individuals.3
PTEs must make estimated tax payments of the PTE tax in the same manner as corporations under Indiana Code Section 6-3-4-4.1(c). A PTE, however, will not be required to make estimated tax payments for tax years ending on or before June 30, 2023. For tax years ending after June 30, 2023, and before January 1, 2025, PTEs must make estimated tax payments; a penalty for underpaying estimated tax will not be imposed except to the extent the underpayment is less than 50% of the PTE tax for the year. For tax years ending after December 31, 2024, a penalty will not be imposed to the extent the underpayment fails to equal or exceed the lesser of 80% of the PTE tax for the tax year or 100% of the PTE tax for the preceding tax year.
SB 2 allows prior estimated tax payments and other tax payments by the electing entity to be credited to the electing entity as tax paid under the elective PTE tax or as tax withheld under Indiana Code Chapter 6-3-4 or Indiana Code Section 6-5.5-2-8.
Additionally, SB 2 amends Indiana Code Section 6-3-3-3 to allow PTE taxes paid to other states to be credited against the amount of Indiana tax payable by PTE owners; to qualify, the other state PTE tax must be substantially similar to Indiana's PTE tax. A credit against Indiana tax payable by PTE owners also is allowed when the PTE pays tax to another state through withholding, a composite return or otherwise. This change is retroactively effective to January 1, 2019.
With the enactment of SB 2, Indiana becomes the 31st jurisdiction to adopt an elective PTE tax as a "workaround" to the federal SALT Cap.4 PTEs and their owners subject to Indiana income tax should consider whether it would be beneficial to elect into Indiana's PTE tax, as well as other jurisdictions' PTE taxes.
The Indiana Department of Revenue is expected to issue guidance on the new elective PTE tax in the coming months.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 An "electing entity" is defined as "a [PTE] described in [Indiana Code Section] 6-3-1-35 that is subject to Subchapter K or Subchapter S of the Internal Revenue Code" and makes the PTE tax election under Indiana Code Chapter 6-3-2.1.
2 An "entity owner" is defined as "the direct or indirect owners of an electing entity that are ultimately taxable on the entity's income under Subchapter K or Subchapter S of the Internal Revenue Code, except an owner described" in Indiana Code Sections 6-3-2.1-(4)(A) — (C).
3 Indiana's individual income tax rate is being phased down through 2029; see Indiana Code Section 6-3-2-1(b) for the applicable tax rate.
4 In addition to Indiana, jurisdictions that have enacted a PTE tax as a workaround to the SALT cap are: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New Mexico, New York, New York City, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin.