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Posted by Tarra Curran on Tue, Jul 20, 2021 @ 05:12 PM


The Tax Cuts and Jobs Act (TCJA) of 2017 caught many states off guard. The speed at which the federal legislation moved did not allow much time for states to react before the calendar year 2017 ended and the 2018 calendar year began, particularly related to the creation of the "so-called" SALT cap.

In response to the limitation on the SALT deduction, many states around the nation are providing potential relief for pass-through entities (PTEs) to effectively allow their owners to avoid the $10,000 limitation on the SALT deduction. The federal government confirmed the viability of these new PTE regimes in 2020, with its guidance in IRS Notice 2020-75, which provides that PTEs that make such elections will be permitted to take a federal deduction for the entity level taxes paid.  

States Respond

To date, 20 states have enacted PTE income taxes (including AL, AZ, AR, CA, CO, CT, GA, ID, IL, LA, MD, MA, MN, NJ, NY, OK, OR, RI, SC, WI), and others have proposed legislation. While most states with PTE income taxes are elective, Connecticut’s PTE tax is mandatory. We’ve highlighted a handful of state PTE tax laws below.

  • California: On July 16, 2021, Gov. Newsom signed the PTE tax into law. PTEs taxed as qualifying partnerships and S corporations may elect to pay tax on income that would otherwise be subject to personal income tax when distributed to qualifying owners. The elective PTE tax would apply to tax years starting on or after Jan. 1, 2021, and end when the federal limit is set to expire after 2025.
  • Connecticut: Applicable to tax years starting on or after Jan. 1, 2018, Connecticut was first to enact a PTE-level tax in May 2018. The PTE tax applies to S corporations, partnerships, and LLCs treated as partnerships for federal income tax purposes. Connecticut law requires a PTE to pay tax on its income at the entity level and provides that owners are permitted a credit of 87.5% of the taxes paid at the entity level.
  • Massachusetts: On July 16, 2021, Gov. Baker signed the PTE tax law. While the law is not officially in effect until all veto periods have expired, it is likely to become effective in its current form. Effective for tax years starting on or after Jan. 1, 2021, eligible PTEs, including S corporations, partnerships, and certain LLCs, may elect to pay tax on their “qualified income taxable in Massachusetts” at a rate of 5%. Individual owners of these electing PTEs may claim a tax credit equal to 90% of their distributive share of tax paid at the entity level. This tax will only be effective while the federal SALT cap is in effect.
  • New Jersey: Effective for tax years starting on or after Jan. 1, 2020, New Jersey allows a PTE to elect to be taxed at the entity level. A PTE with at least one member liable for New Jersey gross income tax may elect to be liable for and pay the Business Alternative Income Tax (BAIT) in a tax year. The PTE election is available to partnerships, S corporations, and LLCs with at least two members.
  • New York: On Apr. 19, 2021, then-Gov. Cuomo signed the PTE tax into law, effective for tax years starting on or after Jan. 1, 2021. It applies to eligible partnerships (excluding publicly traded partnerships), LLCs, and S corporations. The distributive share of income to C corporations or other PTEs is excluded from the PTE tax base.  
  • Rhode Island: PTEs may elect to be taxed at the entity level effective for tax years starting on or after Jan. 1, 2019. Qualified PTEs include S corporations, general partnerships, limited partnerships, limited liability partnerships, trusts, LLCs, or certain sole proprietorships. The tax rate is 5.99% of the PTE’s net ordinary income, less depreciation deductions and/or various other deductions.

This continues to be a rapidly changing environment. Although most of these PTE taxes are annually elective, a few states are making these elections binding until formally revoked. If you would like to discuss how these PTE taxes or proposals affect you, please contact us.


Headshot_Tarra-CurranTarra Curran, CPA is the Private Company Tax Leader and Leader of the State and Local Tax Practice in New England. She can be reached at or 401.626.3240.


Copyright © 2021 CBIZ & MHM (Mayer Hoffman McCann P.C.). All rights reserved. CBIZ and MHM are separate and independent legal entities that work together to serve clients. CBIZ is a leading provider of tax and consulting services. MHM is an independent CPA firm providing audit and other attest services. This article is protected by U.S. and international copyright laws and treaties. Use of the material contained herein without the express written consent of the firms is prohibited by law. Material contained in this alert is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their business.

Tags: Tarra Curran, pass-through, pass-through entities, PTE

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