Similarly, partners in PTET-eligible partnerships that wish to maximize SALT deductions may prefer to sell assets instead of partnership units. This would reduce the cost to buyers that are reimbursing the sellers for their costs of accommodating an asset sale. That said, the availability of PTET deductions inside the corporation should be considered since the deductions may result in a lower tax burden to the sellers. If the shareholders sold stock instead, the state tax would be assessed at the shareholder level and any federal tax deduction would be subject to the SALT cap.Īn asset sale has additional consequences, such as potentially changing the tax character of gain recognized in the sale. The taxable income that passes through to the S corporation’s shareholders would be reduced by the PTET deductions at the PTE level. If the S corporation sells its assets and elects into the PTET regime, the state tax assessed at the entity level wouldn’t be subject to the SALT cap. However, the situation is more nuanced when considering the sale of a PTET-eligible S corporation. Typically, S corporation shareholders prefer to sell stock instead of assets to help ensure that transaction proceeds are taxed at preferential capital gain rates.

Satisfying the requirements for a PTET liability to be deductible for federal tax purposes can be complicated, so taxpayers should evaluate these requirements carefully to ensure the PTET liability is deductible in the tax year the parties intend. Similarly, the deduction for cash-basis taxpayers may be impacted by state law requirements and whether the PTE is legally liable for the PTET payment under state law. A PTET liability is generally not deductible by an accrual-basis PTE until the tax year in which the PTET liability is considered fixed and economic performance has occurred, or an exception applies. The tax year when a PTET liability becomes deductible for federal tax purposes can depend on several factors, such as whether the PTE is a cash-basis or an accrual-basis taxpayer and what steps the PTE has taken to elect into the PTET regime by year-end. Improper planning may result in a significant loss of tax savings, so careful consideration should be given to when the PTET liability is deductible, since that could occur either before or after the closing date. Taxpayers considering a transaction involving a PTE should review the applicable state law to determine potential tax benefits and whether the PTET regime requirements have been met or can be met in the future. State law may also limit the types of PTEs that can make a PTET election, and eligibility issues may affect the PTE’s value at sale. The answer to the timing question may, in turn, influence who ultimately receives the PTET benefit. State law governs when and how a PTET election is made, which may impact the year in which a taxpayer can deduct a PTET payment. The details of the state law authorizing the tax are critical to understanding the potential impact of a PTET election on a transaction. The effect a PTET election has on a transaction depends on many factors, including the applicable state PTET law, timing of the PTET deduction, type of PTE entity involved, and whether assets or ownership interests are being sold or purchased. However, questions remain regarding the tax implications of PTET elections, particularly in M&A transactions. The IRS provided guidance on the federal tax treatment of PTET payments in November 2020.

Because the SALT cap doesn’t apply to taxes assessed at the entity level, the PTE can typically take a federal deduction for its entire PTET payment. Under these regimes, the PTE pays its owners’ state taxes and takes a deduction equal to the tax paid, while the owners receive a credit or exclusion of state income equal to their state tax liability. A growing list of states have enacted laws allowing pass-through entities to elect into pass-through entity tax regimes as a workaround to the $10,000 federal cap on state and local tax deductions for individual taxpayers.

Make a pass through company