By Amy Sandlin, CPA, Tax Senior Manager at Blue & Co.
A pass-through entity tax proposal is currently making its way through the Kentucky General Assembly as part of a larger tax omnibus bill (Kentucky House Bill 360).
The pass-through entity (PTE) tax provisions in the bill are intended to be retroactive to January 1, 2022, which means it could have a significant impact on the 2022 taxes for passthrough entity owners.
Kentucky House Bill 360 is a priority bill of the Republican leadership, so we wanted to ensure you are aware of it, and to let you know we are proactively following its progress
What is a Pass-Through Entity (PTE) Tax?
Individuals who itemize their tax deductions can’t claim more than $10,000 for state and local taxes.
The PTE tax election can be used to get around this limit and lower federal income tax for some people by maximizing their state tax deduction for federal purposes.
For more information on how PTE elections work, see our article here.
30 states have already enacted PTE tax legislation. Kentucky’s neighbor, Indiana, became the 30th state in February.
PTE Taxation in Kentucky: House Bill 360 Explained
The tax proposal will allow PTEs to elect to pay Kentucky income tax at the entity level on the pro rata share of income allocated to individual PTE owners.
If the retroactive date of the bill is successful, Kentucky taxpayers may take advantage of tax savings by making the election with their 2022 PTE returns.
However, since this legislative change occurs during the 2022 tax filing season, our ability to work through its impact and best advise you for your circumstances is limited.
Moreover, the election for 2022 will not be available until after the original due date of the PTE’s federal income tax return (March 15th).
As a result, we may suggest extending your returns to allow us to evaluate the benefits of making the election for 2022.
Challenges and Considerations for PTE Elections for the 2022 Tax Year
There are still many unanswered questions on how this legislation will work if enacted.
We have been actively involved throughout the legislative process by providing objective expert analysis of how provisions will impact Kentucky taxpayers.
We believe additional changes may be made to the bill that could have a significant impact on who will benefit from making the election.
Therefore, for taxpayers that may benefit from a PTE election, we recommend waiting until the bill is enacted before making any decisions about your 2022 taxes.
Our Recommendations: What to Do Next?
We encourage you to submit all tax information and documentation as soon as possible.
This will allow us to evaluate all potential tax savings opportunities for you using the most accurate information for your 2022 taxes.
Be on the look-out for more information from us.
We will be providing personalized recommendations as the bill progresses to ensure taxpayers that may benefit from the election do not lose this opportunity merely because the legislation change occurred during the 2022 tax return filing season.
For now, don’t hesitate to reach out to your local Blue & Co. advisor with any other questions or concerns you may have regarding your 2022 taxes.