Proposed Indiana Bill on Pass-Through Entity Level Tax

We wanted to make you aware of a proposed tax bill being fast tracked through the Indiana state legislature that will potentially have a significant impact to S-Corporations, Partnerships and their owners. As stated below, if the bill is passed as currently drafted, the legislation will likely result in pass-through entities operating in Indiana (and their owners) having to extend the filing of their 2022 tax returns. We will continue to keep you updated as the bill moves through the legislative process.

Synopsis of the Proposed Bill

The proposed bill authorizes certain pass-through entities to make an election (for tax years after December 31, 2021) to pay Indiana income tax at the entity level based on each owner’s aggregate share of adjusted gross income and provides a refundable tax credit equal to the amount of tax paid by the electing entity with regard to the owner’s share. The bill also allows a credit for pass-through entity taxes that are imposed by and paid to another state.

The Indiana bill is similar to the law changes of 29 other states that have implemented a pass-through entity tax (PTE). The benefit of the PTE is that it permits pass-through entity shareholders or partners to obtain a tax deduction for state taxes that would otherwise be limited by the federal $10,000 SALT cap that currently applies to individuals after the Tax Cuts & Jobs Act passed in 2017. This law change results in the owners of eligible entities being able to deduct a larger portion of their state income taxes paid, than they otherwise would, against federal income.

Implications to the Filing of 2022 Tax Returns

The proposed bill is retroactive and applies to taxable years beginning after December 31, 2021. The bill states that for tax years beginning after December 31, 2021 and before January 1, 2023, the PTE election must be made after March 31, 2023 and before August 31, 2024 and that the election shall be made in the form and manner to be prescribed by the Indiana Department of Revenue.

For taxable years beginning after December 31, 2022, the irrevocable election may be made at any time during the taxable year or after the end of the taxable year, but not later than the earlier of: (A) the due date of the electing entity’s return for the taxable year including any extensions; or (B) the date the electing entity files its return for the taxable year.

As a result, for all intents and purposes, extensions will likely need to be filed for all 2022 pass-through entity tax returns that will potentially consider making the pass-through entity election.  Indiana will need to provide instructions to taxpayers on the form and manner in which the election is made along with updating the tax forms to claim the PTE. In addition, we will need to time to analyze each taxpayer’s circumstances in order to determine the potential advantages and disadvantages of making the election.

The bill will likely be advantageous and save federal income taxes for many pass-through entity owners; however, the retroactive legislation does provide for additional tax compliance complexity for the 2022 filing season.

If you have any questions about this bill and how it may affect you and your business, please call us at (317) 608-6699.