Indiana PTET Reform: Proposed Credit Rules and AGI Guidance Signal Major Planning Shifts

Big changes are coming to Indiana’s pass-through entity tax (PTET), and businesses need to pay attention. With newly proposed legislation advancing quickly and updated administrative guidance already in place, the way flow-through entities calculate, pay, and benefit from the PTET is evolving – potentially in ways that could significantly impact tax liability and cash flow. From shifting credit utilization to navigating revised income calculation methods, these developments present both challenges and opportunities. Understanding what’s changing and how to respond will be critical for maximizing benefits and avoiding costly missteps.

The Origin of PTET and the SALT Cap Workaround

The 2017 Tax Cuts and Jobs Act made an array of changes to the state and local tax (SALT) landscape, including limiting the amount of state and local tax an individual could deduct on a personal income tax return – otherwise known as the SALT cap limitation. This change dramatically affected individuals living in states with high income tax rates. To mitigate the impact of the SALT cap limitation, many states implemented state-level income tax on flow-through entities, known as PTET.

Today, significant changes are on the horizon for Indiana’s PTET by way of proposed legislation and updated administrative guidance. Together, these developments could impact how electing pass-through entities (PTEs) calculate and pay their PTET, particularly for those with Indiana resident individual owners.

Legislative Push To Shift Credits to the Entity Level

A key legislative proposal, Senate Bill 453 (SB 453), would allow electing PTEs with direct owners to claim certain credits – such as those for taxes paid to other states – against the calculated PTET payments on the PTET return, reducing the PTET tax liability at the entity level. Currently, these credits can only be claimed on individual Indiana returns, which often results in overpayments and subsequent tax refunds due to Indiana resident individuals. The goal of SB 453 is to reduce the size of PTET refunds and improve cash flow by shifting credit utilization to the entity level. The bill is quickly progressing through the Indiana General Assembly and, if enacted, will apply retroactively to Jan. 1, 2025.

Entity v. Individual Credit Utilization

While the ability to utilize credits at the entity level may initially appear to simplify the PTET reporting process, taxpayers should be cautious not to view this as a one-size-fits-all solution. The application of PTET credits is not restricted solely to income attributable to the PTE. Reduction of entity level tax may reduce or even eliminate the resultant PTET credit that would otherwise pass through to individual owners. As such, the decision to apply available credits at the entity level should not be made in isolation. Instead, it requires a comprehensive analysis of the taxpayer’s overall income profile – including income earned outside the PTE structure – to determine where the credits will yield the greatest net benefit. Failing to take the broader context into account could result in suboptimal credit utilization and a higher overall tax burden.

New Administrative Guidance on AGI Calculation Methods

In addition to these legislative efforts, the Indiana Department of Revenue (IDOR) issued updated guidance in October 2024 affecting how electing PTEs calculate adjusted gross income (AGI) for PTET purposes in 2025. The bulletin outlines two methods for calculating AGI: the Simplified Method and the Standard Method, with the applicable method depending on the direct owner’s specific circumstances. Detailed guidance on both can be found in Indiana Information Bulletin #72B.  In either case, the bulletin also clarifies that capital losses cannot be used to offset other types of income for PTET purposes.

The interplay of this administrative guidance and the proposed legislation is something that should be monitored to maximize the value of the PTET.

Looking Ahead: Estimated Payments and Strategic Re-Evaluation

The timing of SB 453 is particularly significant as it coincides with the implementation of mandatory quarterly estimated PTE tax payments, the first of which is due on April 20, 2025. This proposed legislation coupled with the changes to the Indiana AGI computation creates immediate planning challenges and opportunities for PTEs and their owners. These changes require a re-evaluation of both entity-level and individual-level tax strategies to ensure taxpayers are maximizing benefits.

As Indiana’s PTET landscape evolves, pass-through entities and their owners must remain agile and informed. For assistance navigating these changes effectively and optimizing the PTET’s intended benefits, reach out to your KSM advisor or fill out the form below.