Indiana Enacts PTE Tax Legislation, and Kentucky Isn’t Far Behind

We want to make you aware of legislation in both Kentucky and Indiana that could have a significant (and potentially positive) impact on your 2022 tax filings — the pass-through entity tax.

As you may be aware, the 2017 federal Tax Cuts and Jobs Act limited the state and local tax deduction on individual federal income tax returns to $10,000 a year. Since then, 29 states have enacted legislation that eliminates this cap by moving eligible individuals’ income tax expense to the entity level, where there is no such limit.

Indiana became the 30th state to pass such legislation in February, and House Bill 360 will soon be put to a vote in the Kentucky General Assembly. If passed, the bill will create a provision that allows pass-through entities (PTEs) to pay tax liability at the entity level on behalf of the individual partner, member or shareholder.

When a pass-through entity takes the deduction instead of an individual, the amount of net income passed through to the individual is reduced. The PTE owner, partner or shareholder’s federal taxable income decreases, ultimately resulting in a lower tax liability.

As with the Indiana legislation, the PTE tax provisions in the Kentucky bill will be retroactive to January 1, 2022. Therefore, taxpayers may want to take advantage of the potential savings by making the election with their 2022 PTE returns.

However, the timing of this legislation is tricky, and there are many nuances and unanswered questions. Because the election for 2022 will not be available until after the PTE’s original federal income tax return deadline — March 15, 2023 — eligible taxpayers might want to consider filing an extension to allow ample time to evaluate the potential tax benefits.

Even with an extension, we encourage you to gather all tax documents now so that you will be ready to act on the new election when it becomes available. We also suggest that you work with a trusted tax advisor to navigate these still uncertain waters. Your advisor can help you identify any pitfalls, and maximize your overall tax savings. 

Please reach out to your DMLO tax professional to learn more about how we can help.

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