Pass-Through Entity Tax
A total of 34 states have enacted legislation that creates a pass-through entity tax as a workaround to the $10,000 cap on the state and local taxes (SALT) itemized deduction.
What is Pass-Through Entity Tax?
The pass-through entity tax (PTE) allows partnerships and S Corporations to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election the partner or shareholder is usually allowed to: (1) Claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the partnership or S Corporation, and (2) Allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return.
States with a Pass-Through Entity Tax
A pass-through entity tax went into effect in the following states before 2022:
- Alabama
- California
- Connecticut
- Idaho
- Illinois
- Louisiana
- Massachusetts
- Maryland
- Minnesota
- New Jersey
- New York
- Rhode Island
- South Carolina
- Virginia (2021-2025)
- Wisconsin
States with Pass-Through Entity Tax Starting in 2022
A pass-through entity tax went into effect in 2022 in the following states:
- Arkansas
- Arizona
- Colorado
- Georgia
- Kansas
- Michigan
- Mississippi
- New Mexico
- North Carolina
- Ohio
- Oklahoma
- Oregon
- Utah
States with a Pass-Through Entity Tax that is Retroactive to 2022
A pass-through entity tax was signed into law in 2023 and is retroactive to 2022 for the following states:
- Indiana
- Iowa
- Kentucky
- West Virginia
States with Pass-Through Entity Tax Starting in 2023
A pass-through entity tax goes into effect beginning in 2023 in the following states:
- Hawaii
- Missouri
Pass Through Entity Tax Rules by State
Here are brief details as well as where to learn more about the pass-through entity tax rules for the following States that have enacted a pass-through entity tax:
Alabama
- Partnerships and S Corporations may elect to pay a 5% tax on their Alabama taxable income.
- The entity makes the election by submitting Form PTE-E via My Alabama Taxes. This form may be submitted any time during the year, or on or before March 15 of the following year.
- Partners or shareholders are entitled to a refundable credit in an amount equal to their pro rata distributive share of the Alabama income tax paid by the entity.
- Applicable for Tax Years 2021 and later.
See the Alabama Electing Pass-Through Entity Tax Guidance page on the Alabama Department of Revenue website for more information.
Arkansas
- Partnerships, S Corporations, or a limited liability company with one or more members may elect to pay a 5.9% flat tax on their net Arkansas business taxable income.
- The election must be made on an annual basis and must be approved by business owners holding more than 50% of the voting rights in the business.
- An entity makes the election by completing and filing Form AR362 (Arkansas Pass-Through Entity Income Tax Election or Revocation Form).
- Applicable for Tax Years 2022 and later.
For more information, see the Pass-Through Entity Tax: FAQs on the Arkansas Department of Finance and Administration’s website.
Arizona
- Partnerships and S Corporations may elect to pay a 4.5% flat tax on their Arizona business taxable income.
- The election must be made on an annual basis. Partners or shareholders may opt-out of the election.
- Partners or Shareholders are allowed to claim a Credit for Entity Level Income Tax on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to a partner’s or shareholder’s share of income taxable in Arizona.
- Applicable for Tax Years 2022 and later.
For more information, see the Senate Fact Sheet for HB 2838 on the Arizona website.
California
- Partnerships, S Corporations, and LLCs taxed as partnerships may elect to pay a 9.3% tax on each consenting partner’s or shareholder’s pro-rata share of the entity’s income subject to tax in California.
- The election is made on the entity’s timely filed tax return.
- If entity makes the election, the individual partners or shareholders can choose not to have their income included in the calculation of pass-through entity tax.
- Partners or Shareholders that consent to the election are eligible to claim a nonrefundable credit for the amount of tax paid on their pro rata or distributive share and guaranteed payments included in the entity’s qualified net income. Unused credits can be carried over for up to 5 years.
- Applicable for Tax Years 2021 and later.
For more information, see the Pass-through entity (PTE) elective tax page on the California Franchise Tax Board’s website.
Colorado
- Partnerships, S Corporations, and LLCs taxed as partnerships or S Corporations may elect to pay a 4.55% flat tax on their Colorado business taxable income.
- The election must be made on an annual basis and it is binding on all of the pass-through entity’s owners. The election is made by checking a box on the entity’s applicable Colorado state income tax return.
- Applicable for Tax Years 2022 and later.
For more information, see Colorado House Bill 21-1327 on the Colorado website.
Connecticut
- All pass-through entities are subject to the pass-through entity tax.
- Tax is calculated by one of two methods. The Standard Base is the default method. An entity may elect to use the Alternative Base method. The tax rate applied to the applicable base is 6.99%.
- Partners may claim a PE Tax credit on their personal income tax return. This credit is a refundable credit.
- Applicable for Tax Years 2018 and later.
For more information, see the following on the Connecticut Department of Revenue Services website:
- Pass-Through Entity Tax
- Connecticut Publication OCG-6 (Regarding the Calculation of the Pass-Through Entity Tax)
- Connecticut Publication OCG-7 (Regarding the Pass-Through Entity Tax Credit)
Georgia
- Partnerships and S Corporations may elect to pay a 5.75% tax on their Georgia business income.
- Entity can make the election by checking a box and completing the applicable schedules for Form 600S for S Corporations or Form 700 for partnerships.
- Applicable for Tax Years 2022 and later.
For more information, see Rule 560-7-3-.03 Election to Pay Tax at the Pass-Through Entity Level on the Georgia Department of Revenue’s website.
Idaho
- Partnerships, S Corporations, and LLCs taxed as partnerships may elect and pay a 6.5% tax on the distributive share of their Idaho taxable income.
- The election is made on the entity’s timely filed return. All partners or shareholders must agree.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information, see the Pass-Through Entities page on the Idaho State Tax Commission’s website.
Hawaii
- A partnership or S Corporation may elect to be taxed at a rate of 11% at the entity level. The election must be made each year.
- For tax year 2023, an election must be made by April 20, 2024.
- For tax year after December 31, 2023 the election must be made by April 20 of the taxable year.
- A Pass-Thru Entity’s members may claim a credit equal to their pro-rata share of the tax paid by the Entity.
For more information, see Hawaii Tax Information Release No. 2023-01.
Illinois
- Partnerships and S Corporations may elect to pay a 4.95% tax on their Illinois tax income.
- The election is made on the entity’s Illinois income tax return.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 through 2025.
For more information, see the following on the Illinois Department of Revenue’s website:
Indiana
- New Pass-Through Entity Tax was signed into law on February 23, 2023.
- Retroactive to 2022 and is applicable to years beginning on or after January 1, 2022.
- Partnerships and S Corporations may elect to pay a 3.3% flat tax on their Indiana business taxable income.
- The election must be made by an authorized person of the eligible entity on an annual basis and is irrevocable.
- For Tax Year 2022 the election must be made after March 31, 2023 and before August 31, 2024. For 2023 and beyond, the election can be made at any time during the taxable year.
- Partners or Shareholders are allowed to claim a refundable credit on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to partner or shareholder’s share of income taxable in Indiana.
For more information, see Pass Through Entity Tax page on the Indiana Department of Revenue’s website.
Iowa
- A partnership or S Corporation may elect to pay a tax at the entity level. For 2022 the rate is 8.53% and for 2023 the rate is anticipated to be 6%.
- For tax year 2022, the election to for the pass-through entity tax must be made by December 31, 2023 or the due date for filing the 2022 partnership or S Corporation return. For tax years 2023 and later, the election must be made by the due date of the partnership or S Corporation return.
For more details on how to make the election and other information see the Pass-Through Entity Tax (PTET) page on the Iowa Department of Revenue’s website.
Kansas
- Partnerships and S Corporations may elect to be taxed at 5.7% on the entity’s Kansas taxable income.
- Election is made on the entity’s yearly tax return.
- Partners or Shareholders are entitled to a credit for their direct share of the tax paid by the entity.
- Applicable beginning in 2022.
Kentucky
- Signed into law on March 24, 2023.
- Retroactive to 2022 and is applicable to tax years beginning on or after January 1, 2022.
- Partnerships and S Corporations may elect to pay a 4.5% flat tax on their Kentucky business taxable income for 2023.
- The election must be made with the consent of members of entity holding more than 50% ownership. The election is binding on all members of the entity.
- Partners or Shareholders are allowed to claim a non-refundable credit on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to partner or shareholder’s share of income taxable in Kentucky.
For more information see Kentucky HB 360, Section 16 on the Kentucky Legislature website.
Louisiana
- Entity may elect to be taxed as if they were a C Corporation on their Louisiana taxable income.
- The election is made by filing Form R-6980 with the Louisiana Department of Revenue. The election is in effect for the year the election is made and all succeeding tax years until it is revoked. Owners holding more than 50% ownership must approve the election.
- Applicable for Tax Years 2019 and later.
For more information, see Revenue Information Bulletin No. 19-019 – Guidance on Pass-Through Entity Election on the Louisiana Department of Revenue website.
Maryland
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay an 8% tax on their Maryland taxable income for its members who are individuals. The rate is 8.25% for their corporate members.
- The electing entity must file Form 511 (Pass-Through Entity Election Income Tax Return).
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable to Tax Years 2020 and later.
For more information, see the following on the Comptroller of Maryland’s website:
Massachusetts
- Partnerships, S Corporations, and LLCs taxed as a partnership or S Corporation may elect to be taxed at 5% of their Massachusetts taxable income.
- The election must be made by the entity using Form 63D-ELT. This form must be filed electronically along with their tax return.
- Each resident partner or shareholder is allowed a credit of 90% their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information, see the Elective pass-through entity excise page on the Massachusetts Department of Revenue website.
Michigan
- Partnerships and S Corporations may elect to be taxed at 4.25% on their Michigan taxable income.
- The election must be made by the 15th day of the third month of that tax year. The election is for three years and is irrevocable. The election is made by submitting an estimated payment through Michigan Treasury Online.
- Partners or shareholders may claim a refundable credit that is equal to the member’s allocated share of the tax paid by the entity.
- Passed at end of 2021, retroactive to 2021 and for Tax Years 2022 and later.
For more information, see the Flow-Through Entity Tax page on the Michigan Department of Revenue website.
Minnesota
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 9.85% tax on the entity’s Minnesota taxable income.
- The election is made by completing Schedule PTE (Pass-Through Entity Tax).
- Partners or shareholders may claim a refundable credit that is equal to the PTE tax paid by the entity on their behalf.
- Applicable for Tax Years 2021 and later.
For more information see the Pass-Through Entity (PTE) Tax page on the Minnesota Department of Revenue website.
Mississippi
- Partnerships and S Corporations may elect to pay a tax at the entity level.
- An electing entity will file the Pass-Through Entity Tax Return (Form 84-105), and check the “Electing Pass-Through Entity” check box in order to be taxed at the entity level.
- The entity must make an election by submitting the Pass-Through Entity Election Form (Form 84-381) on or before the 15th day of the third month following the close of the tax year. The election is made for the calendar year it is made and all subsequent years until it is revoked.
- Partners and shareholders may claim a non-refundable credit equal to 95% of taxpayer’s pro rata share of the tax paid by the entity.
- Signed into law on April 14, 2022. Applicable to Tax Years 2022 and later.
For more information, see the Mississippi Department of Revenue Notice 80-22-001.
Missouri
- Partnerships and S Corporations may elect to pay a tax at the entity level at the highest individual tax rate (5.3% for 2023).
- Partners and shareholders may claim a non-refundable credit equal to 95% of the taxpayer’s pro rata share of the tax paid by the entity. Any unused credit may be carried forward to subsequent tax years.
- A partnership or S corporation must make the election each year by submitting a form that will be provided by the Missouri Department of Revenue.
- Signed into law on June 22, 2022. Applicable for Tax Years 2023 and later.
For more information, see the Pass-Through Entity Tax FAQs on the Missouri Department of Revenue website.
New Mexico
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay a tax at the entity level at the higher of the maximum individual income tax rate or the maximum corporate income tax rate (currently both are 5.9%).
- The entity must make an annual election. The election is made by filing an entity level tax return with New Mexico.
- Entity owners are eligible for an income tax exemption on their individual New Mexico income tax return.
- Applicable for tax years beginning on or after January 1, 2022.
For more information see the Pass-Through Entity page, in the Frequently Asked Questions About Direct Taxation of Pass-Through Entities section, on the New Mexico Taxation and Revenue Department’s website.
New Jersey
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay a pass-through business alternative income tax that is due on the sum of each member’s share of distributive New Jersey income.
- Tax rate is on a graduated rate as follows:
- 5.675% of first $250,000
- 6.52% of income between $250,001 and $1 million
- 9.12% of income between $1 million and $5 million
- 10.9% of income over $5 million
- The entity makes the election by first registering with New Jersey Division of Revenue and Enterprise Services and then submitting election form via the NJ Pass-Through Business Alternative Income Tax Online Filing and Payments tool on their website.
- Applicable for Tax Years 2020 and later.
See the Pass Through Business Alternative Income Tax Act page on the New Jersey Division of Taxation website.
New York
- Partnerships, S Corporations, and LLCs taxed as a partnership may elect to pay a tax based on their New York taxable income. The tax ranges from 6.85% if the taxable income is $2 million or less to a high of 10.90% if the taxable income is above $25 million.
- The entity makes the election online via their Business Online Services account.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2021 and later.
For more information, see the following on the New York State Department Taxation and Finance’s website:
North Carolina
- Partnerships and S Corporations may elect to pay a 4.99% flat tax on their North Carolina business taxable income.
- Partnerships may only make the election if all of their partners are individuals, estates, trusts, or certain exempt organizations.
- An entity can make the election on their North Carolina income tax return.
- The election must be made on an annual basis.
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable for Tax Years 2022 and later.
For more information see North Carolina S.B. 105 pages 594 – 599.
Ohio
- Partnerships and S Corporations may elect to pay a 5% tax on their Ohio business taxable income.
- Allows a shareholder or partner to claim a refundable credit on their individual income tax return equal to the PTE owner’s proportional share of the tax imposed on the electing entity.
- Applicable for Tax Years 2022 and later.
See the Ohio’s PTE SALT Cap Workaround for “Electing Pass-Through Entities” beginning in Tax Year 2022 Tax Alert on the Ohio’s Department of Taxation website for more information.
Oklahoma
- Partnerships and S Corporations can elect to be taxed at 5% for individual owners and 6% for corporate owners of the entity.
- The entity makes the election by completing and filing Form 586 (Pass-Through Entity Election). The election is binding until revoked.
- The partners or shareholders subtract any item of gain or add any item of loss that was allocated to them for federal tax purposes to their federal adjusted gross income on their Oklahoma return.
- Applicable for Tax Years 2022 and later.
For more information, see page 7 of the 2021 Oklahoma Small Business Corporation Income and Franchise Tax Forms and Instructions (Form 512-S) on the Oklahoma Tax Commissions website.
Oregon
- S Corporations and partnerships may elect to pay a tax (Oregon PTE-E tax) on their Oregon business taxable income. The tax is at 9% on the first $250,000 and 9.9% on taxable business income above $250,000.
- Shareholders and partners are eligible for a credit on their individual Oregon returns equal to 100% of the member’s distributive share of pass-through entity tax paid.
- Applicable for Tax Years 2022 and later.
For more information, see the Pass-Through Entity – Elective Tax FAQs on the Oregon Department of Revenue’s website.
Rhode Island
- Partnerships, S Corporations, LLCs and sole proprietors may elect to be taxed at 5.99% of their Rhode Island net business income.
- The entity makes the election by filing Form RI-PTE (Pass-through Entity Election Tax Return).
- Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
- Applicable to Tax Years 2019 and later.
For more information, see the following on the Rhode Island Division of Taxation’s website:
South Carolina
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 3% tax on the entity’s active trade or business South Carolina taxable income.
- Entity makes the election by filing Form I-435 (Active Trade or Business Income for Electing Partnerships and S Corporations).
- Applicable to Tax Years 2021 and later.
For more information, see SC Revenue Ruling #21-15 on the South Carolina Department of Revenue’s website.
Utah
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 4.85% tax on the entity’s active trade or business Utah taxable income.
- The election to be taxed at the entity level is made annually. The election is made electronically by filing a SALT report (Form TC-75) via Utah’s Taxpayer Access Point.
- A pass-through entity taxpayer is eligible for a non-refundable credit on their individual Utah returns. The credit is calculated as the amount of the tax paid by the entity on the income attributable to the taxpayer.
- The pass-through entity tax option is available for tax years 2022 through 2025.
For more information see the SALT Report & Tax Facts on the Utah State Tax Commission’s website.
Virginia
- Effective for Tax Years 2021–2025
- Partnerships and S Corporations may elect annually to pay a 5.75% of the entity’s Virginia taxable income.
- Shareholders and partners are eligible for a credit on their individual Virginia returns equal to 100% of the member’s distributive share of pass-through entity tax paid.
See the Pass-Thru Entities page and Virginia Tax Bulletin 22-6 on the Virginia Department of Taxation’s website for more information.
West Virginia
- Signed by the Governor on March 28, 2023. Becomes law on June 8, 2023.
- Partnerships and other pass-through entities may elect annually to pay a 6.5% tax on the entity’s West Virginia taxable income.
- The pass-through entity tax option is available for tax years beginning on or after January 1, 2022.
For more information see West Virginia Senate Bill 151.
Wisconsin
- Partnerships, S Corporations, and LLCs taxed as an S Corp or Partnership may elect to pay a 7.9% tax on the entity’s Wisconsin taxable income.
- Members who hold more than 50% of the entity’s ownership must consent to the election. Election applies to all partners and shareholders.
- The entity makes the election by checking a box on Form 3 or Form 5S. The entity must also complete Schedule 3-ET or Schedule 5S-ET to calculate the entity level tax.
- Applicable for Tax Years 2019 and later.
For more information, see the following on the Wisconsin Department of Revenue’s website:
- Pass-Through Entity Level Tax: Partnership Determining Income and Computing Tax FAQs
- Pass-Through Entity Level Tax: Tax-Option (S) Corporation Determining Income and Computing Tax FAQs
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