Indiana has enacted an elective pass-through entity (PTE) income tax, retroactive to tax year 2022. The new law also amends the Indiana Code to allow a credit against the amount of Indiana PTE tax payable by owners for PTE taxes paid to other states. As discussed in previous articles on PTE taxes, a state’s enactment of a pass-through entity tax triggers a series of questions that PTE owners and their advisors need to ask, and the answers often aren’t clear from the law and a state’s initial guidance. Here’s a quick overview of available details and open questions on Indiana’s PTE law.
What can qualifying PTEs elect, and what’s the rate?
The Indiana law allows a partnership, S corporation, or limited liability corporation (LLC) taxed as a partnership to voluntarily elect to pay any income taxes at the entity-level based on each owner’s share of adjusted gross income. Nonresident owners’ share of pass-through entity income is the amount apportioned to Indiana, while the pass-through entity can elect to compute the tax of a resident owner at 100% or the apportioned share of their PTE income. The election isn’t available to single-member LLCs that are disregarded for federal tax purposes or to PTEs that are qualified subchapter S subsidiaries.
The Indiana PTE tax rate is equal to the state’s individual income tax rate in effect for the taxable year. That rate currently stands at 3.23% for taxable years beginning after Dec. 31, 2016, and before Jan. 1, 2023.
Which taxpayers benefit from the PTE election?
A qualifying owner must be either the direct or indirect owner of a qualifying entity, or the beneficiary of an estate or trust that holds an interest in a qualifying entity. Banks, trust companies, national banking associations, savings banks, building and loan associations, savings and loan associations, or international banking facilities are not qualified owners for purposes of the PTE tax.
Each qualifying owner is entitled to a refundable credit against their Indiana income tax equal to the portion of the tax paid by the electing entity based on the owner’s share of the PTE tax. If an owner is subject to withholding, the entity must still honor those obligations on any amount that exceeds the owner’s share of the pass-through entity tax calculated.
When does an entity make an Indiana PTE tax election?
For tax years beginning after Dec. 31, 2021, and before Jan. 1, 2023 (the period of retroactive application of the new law), the election must be made after March 31, 2023, and before Aug. 31, 2024.
For tax years beginning after Dec. 31, 2022, the election can be made at any time during the tax year or no later than:
- The due date of the electing entity’s return for the tax year, including any extensions.
- The date the electing entity files its return for the tax year.
Once made for a tax year, the election is irrevocable.
How does an entity make the PTE election?
PTEs make the election on an annual basis on the IN-PTET form. Starting with tax returns after Dec. 31, 2022, the election may also be made on the entity’s annual return. The election can be made by an authorized person from the eligible electing entity with the authority to bind the entity. The statute doesn’t describe a process by which owners reach agreement on making the election, so it seems like the entity’s governance rules would apply.
Does a PTE have to make estimated payments?
Electing PTEs must make estimated tax payments in the same manner as corporations. However, for tax years ending on or before June 30, 2023, an electing entity isn’t required to make estimated tax payments.
For tax years ending after:
- June 30, 2023, and on or before Dec. 31, 2024, a PTE must make an estimated tax payment on or before the end of the tax year. There will be no penalty for underpayment of estimated tax if the payment equals or exceeds 50% of the tax.
- Dec. 31, 2024, there will be no penalty for underpayment of estimated tax if the payments during the tax year equal or exceed the lesser of 80% of the tax imposed in the current year or 100% of the tax imposed in the preceding taxable year.
Will the credit for taxes paid to another state include PTE taxes?
For purposes of the credit for taxes paid to another state, the law treats an Indiana PTE owner as if they paid their portion of any out-of-state PTE taxes if the other state’s PTE tax is “substantially similar” to Indiana’s. The owner of a PTE will also be eligible to claim the out-of-state PTE tax on their Indiana return if it was paid on their behalf through withholding, a composite return, or otherwise. Nonresident partners and shareholders that reside in reverse credit states where they are unable to claim the PTET credit can file an IT-40PNR to claim a refund of the PTET credit.
This provision of the Indiana law is retroactively effective to Jan. 1, 2019.
Watch for more details on Indiana PTET
Like other states before it, Indiana’s PTE law provides benefits for owners of pass-through entities but also raises questions that will be answered by administrative guidance. In short, it appears that PTEs that are 100% owned by Indiana residents will almost always benefit from the election. The calculation for entities with a mix of resident and nonresident owners gets more complicated.
