With the fast approaching 2017 Tax Cuts and Jobs Act (TCJA) expiration dates — many set to expire at the end of 2025, Congress must determine if and how to extend, revise or sunset the temporary provisions.
One provision that continues to be debated among members of Congress is the $10,000 state and local tax deduction cap — the SALT deduction cap.
The SALT deduction cap disproportionately affects higher-income tax states (sometimes referred to as “blue states”), and higher-income tax individuals, more so than lower-income tax states (often called “red states”) and lower-income tax individuals. Seeking to address the issue and the politics involved, members of Congress have introduced proposals to repeal the cap, increase the cap and increase the years of the cap.
IRS guidance on the PTET SALT deduction cap workaround
In response to the TCJA creating the SALT deduction cap and various workarounds, the IRS issued Notice 2020-75, providing guidance on one workaround: the passthrough entity tax (PTET), which is a state or other jurisdiction’s elective (or mandatory) entity-level income tax on partnerships and S corporations.
A PTET has been enacted in 36 states and one locality, which you can view in the map and summary information on states’ elective passthrough entity tax. (See resources below.)
The SALT deduction cap will remain a key point of Congressional discussion through 2025.
AICPA advocacy and resources on PTET issues
To advocate on behalf of members and answer your questions, experts are actively engaged in two volunteer groups — the AICPA SALT Technical Resource Panel and AICPA SALT Deduction PTET Task Force.
The AICPA SALT Technical Resource Panel:
Assists state societies as the states consider relevant PTET legislation and develop corresponding guidance.
Monitors states with an enacted or proposed PTET, comparing states’ legislation, the various PTET modifications, and the remaining six states — Delaware, Maine, North Dakota, Pennsylvania, Vermont and Washington, D.C.— that have an owner-level personal income tax on passthrough entity income that have not yet enacted a PTET.
At-a-glance resources available to our members:
Summary on states' PTETs and tax authorities' guidance
Map of states with enacted or proposed PTET and effective years
List of taxpayer and practitioner considerations for whether to elect into a state PTET
List of states with partnership filing requirement if a partner is resident in the state
Chart of states’ PTET credits refundability
FAQ on the federal taxation of state income tax refunds for PTET payments
The AICPA SALT Deduction PTET Task Force advocates with the Congress and the IRS.
Over the past three years, the task force has submitted comment letters to the IRS, requesting federal tax guidance on the treatment of PTET issues:
In 2021, on Notice 2020-75 and forthcoming regulations regarding the deductibility of payments by partnerships and S corporations for certain state and local income taxes
In 2022, on guidance needed on Section 461 accrual basis taxpayers and Notice 2020-75 and forthcoming regulations regarding the deductibility of payments by partnerships and S corporations for certain state and local income taxes
In 2023, guidance needed on alignment of Notice 2020-75 with Internal Revenue Code Section 163 and Section 469 regarding nonpassive versus passive income and interest expense tracing
Available to Tax Section members, the task force developed FAQ on the federal tax treatment of state income tax refunds for PTET payments (see resources above) to answer top-of-mind questions such as, “How is a partner’s or shareholder’s state income tax refund based on a PTET credit treated for federal income tax purposes?”
A library of state and local tax advocacy resources on the states’ PTETs, and the AICPA Tax Section’s State and Local Tax Roadmap and Resource Center present information on each state and their PTET.
If you love podcasts, you’ll enjoy the AICPA Tax Section Odyssey
Hosted by April Walker, CPA, CGMA, the AICPA Tax Section Odyssey podcast showcases experts who discuss pressing topics, provides an overview of tax developments and offers tips for practice management. Episodes that specifically address PTET:
PTET refund roadmap — Expert insights with Dave Kirk, featuring Dave Kirk, CPA, CFP
When to call an audible on the pass-through entity tax, featuring Dave Kirk, CPA, CFP
State implications with the PTE tax, featuring Annette Nellen, CPA, CGMA
The AICPA Tax Section, AICPA SALT Technical Resource Panel, and AICPA SALT Deduction PTET Task Force will continue to monitor, advocate, work with CPA state societies and develop resources for our members on the many states’ PTETs and related federal tax issues.
Join the Tax Section, and we’ll ensure that you stay informed in your planning for tax changes as Congress considers the sunsetting of the TCJA and the SALT deduction cap.
Additional reporting by Ashlin Minogue, M.A., senior content writer at AICPA® & CIMA®, together as the Association of International Certified Professional Accountants.