Indiana Bill Allows C Corporation and Partnership Owners to Pay Taxes at Entity Level

Date March 22, 2023
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Article Authors
Bryan Holm
Bryan Holm

The state of Indiana recently joined 29 other states and New York City in offering an optional pass-through entity tax (PTET) election. The tax is retroactive to January 1, 2022.

In essence, the bill authorizes a partnership or S corporation to make an election to pay tax at the entity level based on each owner’s aggregate share of adjusted gross income. The tax rate is the same as the individual’s income tax rate for that tax year.

The law’s provisions include a refundable tax credit for the amount of tax paid with regard to the owner’s share, which, according to the legislation, “would effectively offset any impact of payment of tax at the entity level on the entity owners.” It also provides for a credit for pass-through entity taxes imposed by and paid to other states.

A few additional notes about the law:

  • Indiana resident pass-through entity owners can elect that ALL of their income from the entity will be subjected to Indiana tax at the entity level.
  • Owners who elect the entity-level tax can claim the credit for the PTET paid on their behalf on their individual Indiana returns.
  • The definition of credit for taxes paid is expanded beyond other states’ withholding tax or composite tax to include PTET paid to other states. The provision opens the door for Indiana resident pass-through entity owners to make PTET elections in other states.
  • Entities can make the election for the 2022 tax year after March 21, 2023, but before August 31, 2024.
  • The $10,000 state tax expense limitation for federal tax purposes does not apply to state taxes expensed by the pass-through entity.
  • The election option is not available to C corporations, trusts, sole proprietorships, or limited liability companies taxed as C corporations for federal income tax purposes.

    • The Indiana Department of Revenue is developing details on how to make the election. It may be necessary to file an Indiana state extension if you intend to take advantage of the legislation.

    Here are other related articles for Ohio and New York for Pass-Through Entities.

    If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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