What is PTE tax?

Pass-Through Entity (PTE) Taxation for Businesses

Definition and Characteristics of PTEs

- A pass-through entity (PTE) is a business structure that is not subject to corporate income tax.

- Instead, the income "passes through" to the individual or corporate owners and is taxed at their personal income tax rates.

- Common examples of PTEs include partnerships and S-corporations.

- PTEs are often used by higher-income individuals and can involve complex tax arrangements.

IRS Focus on PTE Compliance

- The IRS has established a special workgroup within the Large Business and International (LB&I) division to focus on large or complex pass-through entities.

- This initiative is part of a broader effort to ensure compliance among high-income filers and to address non-compliance related to pass-throughs.

- The new unit will leverage funding from the Inflation Reduction Act to target large partnerships that may use pass-throughs to shield income and avoid taxes.

- The IRS aims to maintain low audit rates for middle- and low-income filers while increasing scrutiny on wealthy and large entities.

Deductibility of State and Local Taxes for PTEs

- The IRS has announced forthcoming regulations to clarify that state and local income taxes paid by a partnership or S corporation can be deducted by the entity in computing its non-separately stated taxable income or loss.

- This is relevant for entities that are subject to state and local income taxes and impacts how these taxes are treated for federal income tax purposes.

State-Level PTE Taxation

- Many states have adopted pass-through entity taxes as an option in lieu of taxes on the entity’s owners.

- These state-level PTE taxes often provide a credit or offset for the owner’s share of the tax paid by the entity against any tax owed by the owner on that income.

- The specifics of these taxes can vary by state, and the information is subject to change.

IRS Resources and Guidance

- The IRS provides various forms, instructions, and resources for PTEs, including Form 1120-S for S corporations and Form 8990 for the limitation on business interest expense under Section 163(j).

- The IRS also maintains a knowledge base and practice units to assist with international tax compliance, including the treatment of foreign entities under the Check-the-Box regulations.

Global High Wealth Industry Focus

- The IRS's Global High Wealth Industry group within the LB&I division focuses on high-income earners and their related entities, including PTEs.

- This group performs detailed risk assessments and case building to ensure compliance among high-wealth individuals and their associated pass-through entities.

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Sources:

IRS to establish special pass-through organization to help with high ... 2024-08-02

Part III - Internal Revenue Service 2024-08-01

1.1.24 Large Business and International Division 2024-08-02

STATE RULES ON TIERED PARTNERSHIPS - mtc.gov 2024-07-31

Instructions for Form 1120-S (2023) | Internal Revenue Service 2024-08-03

Large Business and International LBI Division - Internal Revenue Service 2024-08-02

Instructions for Form 8990 (Rev. December 2022) - Internal Revenue Service 2024-08-03

State Pass-Through Entity (PTE) Taxes - MTC 2024-07-29

LB&I Concept Unit Knowledge Base - International - Internal Revenue Service 2024-08-03 https://www.irs.gov/pub/int_practice_units/ore_c_19_02_01.pdf

Chapter 52. Global High Wealth Industry - Internal Revenue Service 2024-08-02