“Most states provide a credit on the resident state income tax return for taxes paid to other states, but only if those taxes are paid at the individual level,” Christian said.
“Taxpayers who operate a profitable sole proprietorship that operates in a state which has passed a pass-through entity tax should evaluate whether forming a partnership or S corp to take advantage of this pass-through entity state and local tax deduction would be worthwhile,” Christian said.
Advisors may also need to consider inserting pass-through entities between the existing operating company and the partners/shareholders if some of the latter want to make the elections but others don’t, he said.
PTETs aren’t for all organizations, advisors say.
“PTET participation is generally not available to single-member LLCs or sole proprietorships,” Corrie said. “Another thing to consider is, how do the state’s PTET provisions deal with tiered structures? In many cases, each partnership may have to make its own PTET tax election. The credits may only flow through to individual partners, members and S corporation shareholders, which obviously presents a problem in tiered structures.”