November 1, 2023
By: Deborah L. Kurtzke, CPA, MST, DK Tax & Accounting Inc., [email protected]
Illinois PTE a way to eliminate SALT Cap for Individuals
The pass-through entity (PTE) tax is an income tax that certain partnerships and subchapter S corporations can elect to pay on behalf of their partners and shareholders. This tax is effective in Illinois starting for tax years after December 31, 2021, and before January 1, 2026. An entity making the election is subject to the 4.95% Illinois tax on its net income. The partners or shareholders of the PTE may claim a credit on their Illinois personal income tax return for their share of the PTE’s tax paid.
Why Elect to Pay the PTE Tax?
The 2017 Tax Cut and Jobs Act limited the itemized deduction on the individual federal tax return for state and local income tax (SALT) to $10,000 per year. This limitation negatively impacted many individual taxpayers, including those who receive income from pass-through entities. As a workaround for this deduction, states started allowing certain pass-through entities to pay tax at the entity level on behalf of their members. The tax paid by the entity is a deduction against the income from the business, allowing the entity to report less business income to its members, which may result in less income tax on their individual federal income tax returns if their SALT itemized deduction was limited. Since the tax paid is an entity-level deduction passed on to the members, the individual members still benefit from a state income tax deduction not limited by the $10,000 SALT cap. Additionally, non-itemizers can receive a state income tax deduction on their federal income tax returns that they otherwise were unable to deduct.
Required Estimated Tax Payments
Partnerships or S corporations electing to pay the PTE tax may need to make quarterly estimated tax payments. The estimated tax payments are required if the reasonably expected PTE tax and replacement tax due is greater than $500. The estimated payments must equal at least 90 percent of the current year’s tax liability or 100 percent of the prior year’s tax liability. The current year threshold applies if in the previous tax year, there was no tax liability reported or it was a short taxable year.
These estimated payments are generally due April 15, June 15, September 15, and December 15 in the applicable year for which the PTE tax is elected, with the payment due on the following business day if the due date is on a weekend or holiday. Illinois assesses late payment penalties if the entity does not pay the entire quarterly installment amount by the applicable due date. Payments are applied to the earliest due date until the entire estimated liability is paid unless the entity provides specific instructions to apply an amount to another period.
Shareholders or partners can claim a credit for the PTE tax paid against their individual income tax liability to the extent of their share of the PTE tax liability. If the PTE tax is overpaid, the entity should request a refund.
Abatement of Penalties
The Illinois Department of Revenue (IDOR) will abate late fourth quarter estimated tax penalties for the 2022 PTE tax if the entity paid their entire required fourth quarter payment on or before January 17, 2023. The department is assessing penalties on unpaid fourth-quarter amounts starting on January 18, 2023. IDOR announced this in a bulletin released in August 2023.
Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.