On Monday, February 20, Senate Bill 2 (SB2), “Taxation of Pass-Through Entities,” was passed by the Indiana House and is headed to Governor Holcomb’s desk to be signed into law. As explained in our previous article, this legislation allows pass-through entities to make an election 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 legislation is similar to the law changes of 29 other states that have implemented a pass-through entity tax (PTE). The benefit of PTE legislation is that it allows pass-through entity shareholders or partners to obtain a tax deduction for state taxes that may otherwise be limited by the federal $10,000 SALT cap that currently applies to individuals after the Tax Cuts & Jobs Act passed in 2017. The Indiana law change may result in the owners of eligible entities to be 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 PTE legislation is retroactive and applies to taxable years beginning after December 31, 2021. 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 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.
The PTE legislation will be beneficial for many pass-through entity owners, and we are working to analyze the pros and cons of making the election for each of our clients. The retroactive nature of the legislation will result in the need to file extensions for those pass-through entities (and their owners) that decide to make the PTE election for the 2022 tax year. The Indiana Department of Revenue (IDR) will be issuing future guidance on the procedures necessary to make the election along with providing updates to the 2022 tax filing forms.
If you have any questions about this bill and how it may affect you and your business, please call us at (317) 608-6699.