In an effort to help business owners circumvent the federal State and Local Tax (SALT) deduction cap, Kansas passed legislation allowing pass-through entities (PTEs) to elect to pay taxes at the entity level. This offers significant tax savings for business owners.
What is the SALT Cap?
Under the Tax Cuts and Jobs Act (TCJA) of 2017, individuals are limited to deducting a maximum of $10,000 in state and local taxes on their federal return. This cap affects taxpayers in states with high income or property taxes. Kansas introduced a workaround, known as the PTE SALT deduction, for owners of pass-through entities such as S-Corporations, partnerships, and LLCs taxed as partnerships.
How Does the Kansas PTE Election Work?
- Entity-Level Taxation: Instead of income being passed directly to individual owners (who would pay state tax on their personal return), the pass-through entity can elect to pay Kansas state taxes at the entity level. This payment is fully deductible at the federal level, effectively bypassing the $10,000 SALT cap for individual taxpayers.
- Flow to the Individual’s Return:
- At the Entity Level: The PTE makes quarterly estimated tax payments on behalf of the owners. These taxes are reported and paid when the entity files its Kansas tax return.
- On the Owner’s Individual Return: Each owner’s share of the state tax paid at the entity level is then passed through to their Kansas K-40 personal income tax return as a credit. The individual will report the income from the entity on their personal federal and state tax returns, but they will receive a credit for taxes paid by the entity.
- Federal Tax Benefits: By paying taxes at the entity level, the PTE can deduct the state taxes paid in full on the federal return, which reduces taxable income for the owners. This deduction is not subject to the SALT cap, giving business owners potential tax savings.
Summary of the Process:
- Step 1: The PTE elects to pay Kansas state taxes at the entity level.
- Step 2: The PTE makes tax payments to Kansas on behalf of the individual owners.
- Step 3: The entity’s tax payments flow through to the owner’s individual Kansas return as a credit.
- Step 4: The owner benefits by receiving a federal deduction for the entity-level tax paid, bypassing the SALT deduction cap.
This option can provide significant tax savings for Kansas business owners who are impacted by the federal SALT cap, but it’s essential to consult with a tax professional to ensure the election is made properly and all reporting requirements are met.
If you’re looking into this election, don’t hesitate to discuss it with a CPA who can help you determine the best tax strategy for your situation.
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