Indiana PTE Tax Bill

On February 22, 2023 Governor Holcomb signed into law Senate Bill 2, a bill that saw Indiana join 29 other states in enacting a Pass-Through Entity (PTE) Tax. The idea behind this bill, and other PTE bills, is to shift the tax burdeon off of the individual owners who are limited at deducting $10,000 in State and Local Taxes (SALT) on their Federal Schedule A over to the business entity. The SALT limit was a result of the 2017 Tax Cuts and Jobs Act (TCJA).

The TCJA increased the standard deduction from $12,000 to $24,000 for married couples. In addition to this increase, the GOP controlled congress also capped the SALT deduction at $10,000. They did this under the reasoning that liberal states had higher state taxes, and thus were getting an unfair tax deduction compared to their more conservative states with lower taxes. We wish we could say we were joking, but that is actually where the state of our federal politicians has sunk to. 

Almost immediately after the TCJA was passed in 2018, Connecticut enacted the first PTE bill that allowed all Partnerships and S Corporations to elect to pay the state income tax that was generated by them. This allowed a business owner to claim a federal income tax expense on their business for the state income taxes paid on their business income. Prior to this the state income taxes paid would be subject to the SALT limit, and paid at the owner level.

So in 2017 if a business made $100,000 in profits, and a state had a 5% income tax, the business owner would have had a tax bill of $5,000 just off the business income. If that same business owner had real estate taxes and withholding taxes from their W-2 wages of $6,000 in total, the business owner would only get to deduct $10,000 in taxes, even though they had paid $11,000 in total. 

With this new PTE tax change, the business owner can now deduct $5,000 at the business level, and $6,000 on their Schedule A. The business owner would then also get a credit on their state tax return for the $5,000 payment that the business made, keeping them in the same tax situation as before for state income taxes. 



From 2018 until 2023, 29 states passed legislation allowing PTE's to pay tax in the same manner (8 states have no state income tax). The State of Indiana, in 2023, finally passed legislation to allow business owners this same deduction that the 29 other states had since passed. This is what SB-2 is, it also allows for business owners to receive credit on their state tax return if they paid income taxes to other states through their business. 

As a brief example, if that same business owner operated in Indiana with a net profit of $100,000 they would incur a state tax of 3.23%, or $3,230. Prior to SB-2 the business owner would then owe $3,230 of income taxes with their individual tax return. 

Under SB-2, the business would write a check for $3,230 to the Indiana Dept of Revenue for income taxes and the business owner will get a tax credit for $3,230 because they will still be taxed on that $100,000 at the state level. So the same tax is being paid, only the business pays it now instead of the individual business owner. By having the business pay the tax, we would then make their federal business taxable income $96,770 instead of $100,000. Assuming the business owner is in the 22% tax bracket, that $3,230 payment would equal a federal tax savings of $711. The higher your business net profits, or the higher your federal tax bracket, the greater the savings. 

This presents a great array of tax planning ideas that previously were not at our disposal. Should a husband and wife rental LLC currently being filed as a Schedule E elect to be taxed as a 1065 Partnership? With SB-2 in play, they can now shift the tax burden to the partnership and reduce their federal taxes. The offset is they will have to pay for a 1065 return to be prepared. 

The issue currently facing Hoosier business owners and tax preparers is that no one in the legislature (or lobbyist groups) who pushed for this to be retroactive to 1/1/2022, appears to have consulted the Department of Revenue to help create a form for this tax to actually be paid. And if they did ask, they didn't make sure the form would be ready. As a result, this election can not be made prior to March 31, 2023. 

The current due date for PTE's is March 15, 2023. This presents a problem.

PTE's will be forced to extend their filing, which is a simple enough process, but one that should not have been required had the bills author (Senator Scott Baldwin) bothered to consult with practicing CPA's, or listened to the concerns of the Indiana CPA Society who opposed the retroactive date for this very reason. However, groups like the Indiana Chamber, who have zero tax background, pushed for the retroactive date because they don't have to deal with the mess that results. Luckily, the Department of Revenue has stated they will not charge late payment penalties or interest on any payments related to this tax through August 31, 2024. This begs the question, if the bill allows for payments a full 16 months after the initial date, why did they pass it in February for the previous year? Why couldn't they get this done in say October? Or even December? 

This then presents the biggest issue for preparers, specifically smaller firms. How do you process your business income tax returns that you typically have from January-April 15th to complete and now have April 1 - April 15 to complete with the new changes, while also getting done all the other work you have in that time? The answer for most will be to extend your tax season, yet again, to account for the ideocracy that is our elected officials attempting to help. 

As a business owner, you now most likely have to delay filing as well. While we can calculate the amounts due (or refunds owed), you wait. The fact that we can't finalize them and move on is extremely frustrating and why Indiana business owners and practitioners need to contact their representatives to tell them this was horrible timing. It is important to emphasize that your local politicians have no idea how this impacts you unless you contact them. 

In Indiana, we also have Personal Property Taxes, which are filed right after income taxes. Typically this is an easy process, and one that the state has allowed us to start to add in with the income taxes when they changed the value date to January 1 instead of March 1. However, in an effort to show they can in fact do more ridiculous timing changes, there is currently House Bill 1430 being discussed which would virtually eliminate the PPT filing. While we are all in favor of this, to be in 2023 and making a tax law change for the 2023 tax filing that has already started, is once again a sign of ignorance.