Daniel HonanFounder, Profitable Painter CPA PLLC · I help painting contractors increase profits & cash flow while reducing taxes♦ Bookkeeping ♦ Tax

Painting Business Owners: Curious if your biz qualifies for #PassThroughEntityTax.

Name: Painting Business Owners: Curious if your biz qualifies for #PassThroughEntityTax.
Uploaded: 2023-10-13T14:08:13+00:00
Duration: 53 s
Channel: Daniel Honan
Description: The speaker outlines the emerging "pass‑through entity tax" (PTET) adopted by many states. The election applies only to owners of entities that are taxed…

13 Oct 2023 · 1 min

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The speaker outlines the emerging "pass‑through entity tax" (PTET) adopted by many states. The election applies only to owners of entities that are taxed separately – such as shareholders of S corporations or partners in partnerships – and does not apply to sole proprietors or single‑member LLCs that are disregarded for tax purposes. Under a PTET, the entity can elect to pay the owners' state income tax liability. Because there is no cap on the amount an entity can deduct for state taxes, the entity takes a full deduction, which then passes through to the owners’ individual returns. Owners can still claim the standard deduction on their federal return, effectively allowing a form of double‑dip: they benefit from the entity’s full state‑tax deduction while also retaining the standard deduction, which can be advantageous whether they have enough state tax to itemize or are limited by the $10,000 SALT cap. The speaker highlights how this strategy can reduce overall tax liability for many small‑business owners, especially married couples whose standard deduction is $27,700.

Chapters

a lot of states started coming up with what they call the pass-through entity tax. And that is where you can, if you are a shareholder in an S corp or a partner in a partnership, or you have some kind of involvement in a, a business entity that is taxed separately. So if you're a sole proprietor or an LLC that's disregarded, this does not apply. But if you belong to some kind of entity, you can elect to have that entity pay your state income taxes for you, essentially. And the reason that is a workaround is there is no cap on what an entity can deduct. For state taxes. So if the entity pays it for you, that entity can take the full deduction, which is then passed through to its shareholders or partners. Plus you can still take the standard deduction on your form. So there's a little bit of double dipping there even where maybe you don't have enough taxes to justify itemizing. Their deduction is $27,700 for a married couple. Maybe you'll never hit that. Let the entity pay it for you. You can still take the $27,700, or maybe you've got a ton of taxes which are running up against this $10,000 SALT limitation. Let the entity pay it for you, get the full deduction, and save quite a bit.