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This blog addresses Utah’s pass-through entity tax; you’ll learn what it is, how it works, etc.

What you need to know about the Utah passthrough entity tax

The SALT cap became law in 2017, limiting state and local tax (SALT) deductions to $10,000 ($5,000 for married filing separately). This hit residents in states with higher state or property tax harder than those with lower local taxes. As states looked for a workaround to this, the Passthrough Entity Tax (PTET) has become popular. This blog addresses Utah’s pass-through entity tax; you’ll learn what it is, how it works, etc.

Before we get started, here are some blogs about taxes for Utah residents:

Tax Planning and Your Finances in 2022

Strategies for reducing tax impact when selling a business

New Tax Laws in Utah: How Will They Affect You?

It’s important to recognize that the information contained within this article is intended to be general in nature. Also, please recognize that this information is subject to change at any point. Nothing herein can be interpreted as tax or financial advice; for such guidance specific to your situation, consult with a CPA or financial advisor.

And now onto the blog!

IRS ruling on Passthrough Entities

In 2020, the IRS stated its intention to make it so that certain Pass Through Entities are not subject to the $10,000 SALT deduction limitation, essentially allowing PTE workarounds.

That’s the simple part. Here’s where it gets complicated.

Since then, 30 states have passed or proposed legislation. Each state has different procedures, requirements or limits that apply to their PTE election.  This can create complications for how multi-state businesses will apply this strategy.

StateFirst Effective YearStateFirst Effective Year
Alabama2021Mississippi2022
Arizona2022Missouri2022
Arkansas2022New Jersey2020
California2021New Mexico2022
Colorado2018 (retroactive)New York2021
Connecticut2018 (mandatory)New York City2023
Georgia2022North Carolina2022
Idaho2021Ohio2022
Illinois2021Oklahoma2019
Kansas2022Oregon2022
Louisiana2019Rhode Island2019
Maryland2020South Carolina2021
Massachusetts2021Utah2022
Michigan2021Virginia2021
Minnesota2021Wisconsin2018
Source: PBMares

Utah passthrough entity tax

In March 2022, legislation was passed in Utah allowing qualifying pass-through entities to make an annual election to pay an entity-level state tax. This would apply to the time period between January 1, 2022 and December 31, 2025.

How does the SALT cap work?

The SALT cap limits how much state and property tax you can deduct on your federal return. This applies only to personal taxes, not business taxes. Business owners can deduct state income taxes without limit if the taxes are paid at the business level.

How does a passthrough entity work?

Here’s how it works when you authorize a PTE to pay a tax on behalf of pass-through entity taxpayers who are individuals.

Pass-through entities in Utah pay the standard state income tax rate which is 4.95%, which is the same as the individual state income rate. PTE’s don’t pay taxes as a company, they “pass through” the business income to individual’s tax returns based on each person’s percent of ownership in the business. The individual then pays tax according to their personal tax profile.

Here is a simplified example.

  • LMNOP Partnership elects for 2022 and pays $75,000 state tax on behalf of Bobby.
  • Bobby would now have a credit for $75,000 against his own personal tax liability.

Normally Bobby would not be able to take $75,000 deduction of state taxes due to the SALT limitation. By utilizing this election, LMNOP deducted those state taxes against their own income before passing it through to Bobby.

Who qualifies?

To qualify, a PTE must pass through their tax to an individual. This is complicated as there are Pass through entities that pass through to other entities, but may eventually tier down to individuals. Each situation is different.

Please note that the purpose of this blog is to provide high level information and cannot be construed as advice; you should consult a tax professional if you have multi-tier structure or if you desire recommendations specific to your individual situation.

Entities that are eligible:

  • Partnerships
  • Limited partnerships
  • Limited liability companies if classified as a partnership for federal income tax purposes
  • Limited liability partnerships
  • S electing corporations

Not Eligible – non individuals

  • Trusts can pay tax on a beneficiary’s behalf, but if the trust is in a partnership it can not pay taxes on behalf of the trust.
  • Partnerships between Partnerships. The exception is a partnership that is a beneficiary of a trust.
  • C-Corporations (even if within a partnership)
  • A trust that owns a passthrough entity

Passthrough entity tax and Utah

Utah business owners may structure your business so that you pay tax on business income of the PTE to the extent the business income is derived from Utah sources. This can be paid on business income of the passthrough entity and nonbusiness income derived from Utah sources. This can be applied to state taxes paid to other states if certain conditions are met.

For multi-state entities, this could be more complicated and may not benefit all members. Carefully evaluating each individual’s tax profiles will be necessary to know if each owner will reduce their tax liability by electing this passthrough entity tax.

It is useful to note that this can only be applied to income sourced from that PTE. Taxpayers cannot pull income from sources outside of the entity, pay the state income tax and then pass through to the individual for the credit. Utah state and the Federal government have said this will immediately cause penalties and your election could be disallowed. Be sure not to count W2 income from another source, portfolio income, real estate income, etc. as income taxable to the PTE that can be used for this deduction.

In Utah, the tax must be paid in the year it is earned. Most individuals will not know their tax until after year end once the books are finished. In order to take advantage of these elections, taxes will have to be estimated. If you overpay, you can carry the credit for five years. It may not be carried back. The credit is non-refundable and irrevocable for the year you elect; each year you can decide if you want to elect to take the credit.

The entity must pay the tax due before the last day of the taxable year, and then notify the individual that they paid on their behalf by providing a statement with the amount paid.

The individual may claim a non-refundable tax credit against their Utah individual income tax. The credit is equal to the amount of the tax paid by the PTE on the income attributed to the individual. The entity will also pass through all income to the individual’s tax form based on percent of ownership.

How to claim credit for Utah withholding tax

According to Utah.gov, here is how to claim credit for Utah withholding tax paid on your behalf by a pass-through entity.

On your Utah Schedule K-1, enter this information:

Line 1 – The pass-through entity’s federal EIN (Schedule K-1 box A).

Line 2 – The pass-through entity’s name (Schedule K-1 box B).

Line 3 – The Utah withholding tax withheld or paid on your behalf

Sum up the amounts of pass-through entity Utah withholding tax.

Enter the total on form TC-40, page 2, line 35.

Keep in mind that you don’t have to send in the Utah Schedule(s) K-1 with your return – but you should retain a copy for your own records.

For more information on Utah pass through entity withholding, see this piece on TC-40W. Please note, the State of Utah may still change the guidance on how to pay and claim.  Be sure to consult with your tax advisor for the latest updates.

Will you be paying passthrough entity taxes anytime soon?

We hope our piece on passthrough entity taxes and the state of Utah was helpful to you.

Before we go, please note that this is article is not intended to be tax advice or to substitute for a comprehensive financial plan. It’s intended to make business owners in Utah aware they may want to take action before the end of the year if this election would benefit them. You should consult with your tax adviser on your personal situation.

At Rock House Financial, a fee-only financial advisor in Farmington, Utah, we serve families and business owners and tax planning is a big part of how we help.

If you would like to speak with us, please reach out.

Sources

Deloitte Tax LLP. (24 March, 2022). Tax alert: Utah enacts pass-through entity tax election. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-utah-enacts-pass-through-entity-tax-election.pdf

Eco-Tax, Inc. (14 April, 2022). States Pass Elective PTE Tax: A Workaround for the SALT Cap. https://eco-tax.com/2022/04/14/states-pass-elective-pte-tax-a-workaround-for-the-salt-cap/

PBMares.Pass-through Entity Elections Are Here to Stay: What You Need to Know. Retrieved from https://www.pbmares.com/insights-salt-pass-through-entity-elections-are-here-to-stay-what-you-need-to-know/

Reuben, Kim S. (2021, June 24th). Tax Policy Center. State Pass-Through Entity Taxes Let Some Residents Avoid the SALT Cap at No Cost to The States. https://www.taxpolicycenter.org/taxvox/state-pass-through-entity-taxes-let-some-residents-avoid-salt-cap-no-cost-states

Utah SALT Workarounds: Traps & Benefits. (2022, May 11th). Utah State Tax Commission SEAL.https://utahtaxpayers.org/wp-content/uploads/2022/05/Valentine.pptx

VitalLawTM. S.16, Utah—Corporate, Personal Income Taxes: Elective Pass-Through Entity Tax Enacted, (Mar 29, 2022). https://www.vitallaw.com/news/utah-corporate-personal-income-taxes-elective-pass-through-entity-tax-enacted/std0180bedf25bb354fe68e3684222d2e4927

Utah.gov. Pass-through Entity Withholding. Publication 68. https://tax.utah.gov/forms/pubs/pub-68.pdf

Utah.gov. Utah Income Taxes. Pass-through Entity Withholding – TC-40W, Part 3. https://incometax.utah.gov/credits/pass-through-entity

Disclaimers

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

Case studies presented are purely hypothetical examples only and do not represent actual clients or results.  These studies are provided for educational purposes only.  Similar, or even positive results, cannot be guaranteed.  Each client has their own unique set of circumstances so products and strategies may not by suitable for all people.  Please consult with a qualified professional before implementing any strategy discussed herein.  No portion of these case studies is to be interpreted as a testimonial or endorsement of the firms’ investment advisory services.