Pass-through tax elections and composite payments

For owners of pass-through entities such as partnerships, S corporations, and LLCs, state-level tax obligations can get complex—especially when it comes to composite payments and pass-through entity elective taxes (PTET). Each option offers potential benefits but also comes with drawbacks that can influence tax strategy.

Composite Payments allow the entity to file and pay state income tax on behalf of non-resident owners, simplifying compliance. This reduces the administrative burden on individual owners, who may not have to file separate state tax returns. However, composite payments often apply a flat tax rate and may not allow all individual deductions or credits, potentially leading to a higher tax bill compared to filing individually.

On the other hand, Pass-Through Entity Elective Taxes (PTET) emerged in response to the federal SALT (state and local tax) deduction cap. Under PTET regimes (available in many states), the entity itself elects to pay state income taxes, and the owners receive a credit or income adjustment on their federal return. The key benefit here is the federal tax deduction for state taxes paid at the entity level—effectively bypassing the SALT cap. However, PTET elections can be complex, vary greatly by state, and may require advance planning, including meeting deadlines and submitting specific forms.

Composite payments simplify multistate compliance but can be less tax-efficient, while PTET can offer meaningful federal tax savings but adds complexity. We will work closely with business owners to determine the optimal approach based on their entity structure, residency status, and tax goals.