PTE Election Question(s)

[Terry D EA]

I have been studying the PTE election specifically for NC and SC. I've not looked into SC yet or if they even permit it. From what I've learned from NC, I fail to see any benefit with this election at all. Example, S-Corp has income of 200K. If you elect the PTE, the tax is calculated at the shareholder's tax rate. This example is for NC resident shareholder. This does not appear to take into consideration the shareholder's individual deductions to arrive at the tax due. However, the NC instructions state to use 4.99% In the example, the tax due would be $9,980. After deductions, allowed losses; etc the shareholder has a balance due of $1800.00.  With this information, I see absolutely no advantage or reason to make the PTE election.  I understand the tax paid is deducted as an ordinary business expense but it still appears more tax is being paid than if the election wasn't made. 

To add a bit more confusion, the instructions from NC aren't clear when the expense is deducted. I'm assuming in the year it was paid. NC has a section of calculation that shows the common deductions etc. But, I'm using Drake, and there is no where to make any entries to reflect the shareholder deductions. There is a screen for shareholder K-1 withholding that the drake support person couldn't figure out what that was for either. As a test, I made entries on the form and the information did not flow anywhere.  

Anyone agree with me about the benefit of making this election that it appears there isn't any for a NC resident shareholder. I'm willing to play with this a bit more and am looking for other opinions.

[Lee B]

The way it works in my state is as follows

Lets assume taxable income of $100,000 and a state tax rate of 10%. PTE Tax = $100,000 x 10%= $10,000.

S Corp pays 4 estimated payments totaling $10,000 which reduces Federal Taxable Income  -  $100,000 - $10,000 = $90,000 thus reducing shareholders

Federal Income Tax by $10,000 x 24% (marginal tax rate) = $2,400.

In my state the $10,000 is an add back to state taxable income and the $10,000 increases the shareholder state income tax paid.

Net Result is a $2,400 reduction in Federal Income Tax and no change in State Income Tax.

 

[Patrick Michael]

Not sure about NC, but I'm assuming the 4.99% is an estimated tax that has to be paid.  In NY, the estimated tax rate is a little higher than most taxpayers actual tax rate.  When the NY return is prepared, the PTE is added back into taxable income and it is taxed at the TP rate.  The estimated payment made by the S Corp is added to the total payments.

For example, single member S Corp has $100,000 profit.  Estimated PTE payment is 6% ($6,000).  S Corp profit is reduced by the $6K and the TP saves their federal marginal tax rate.

On the state return the TP adds back in the $6K PTE, bringing taxable income back up to $100K.  Marginal rate is 5% so they have a tax liability of $5,000 (which is the same as they would have if they did not pay the PTE).  They then apply the $6K estimated payment to their total payments, getting them a refund of $1,000 of the $6,000 they paid in.

 

 

[Terry D EA]

"Not sure about NC, but I'm assuming the 4.99% is an estimated tax that has to be paid." For NC this is indeed true. It makes sense to calculate the estimated tax payments based on the shareholder's rate and liability, then deduct that amount from the S-corp books. Reducing the Federal and State income/loss that passes through. I still have to keep reading cause not sure if any of this is correct yet. 

[Lee B]

https://www.thetaxadviser.com/issues/2022/nov/federal-implications-passthrough-entity-tax-elections.html