Tax Alert: Pass-Through Entity Tax on Fast Track Through Indiana General Assembly

In an effort to reduce federal taxes for certain taxpayers, the Indiana General Assembly is expediting Senate Bill 2 (SB2), which would create an optional state-level pass-through entity tax (PTET) with a retroactive effective date of Jan. 1, 2022. The bill is expected to be signed into law as early as next week.

What Is PTET?

In 2017, the Tax Cuts & Jobs Act (TCJA) created a federal tax law that limits the amount* of allowable state and local tax deductions for a taxpayer who itemizes. Called the “SALT cap limitation,” this law particularly impacts individuals living in states with high income tax rates and pass-through entity owners.

As a workaround to the SALT cap limitation, individual states began to enact an optional state-level income tax on pass-through entities, otherwise known as PTET. This shifts the state and local tax deduction from an individual taxpayer to an entity level that is not subject to the limitation. In other words, eligible entities will be able to deduct a larger portion of their state income taxes paid against federal income. To date, 29 states have enacted a PTET.

Impact of an Indiana PTET

While the federal tax savings eligible Indiana entities could realize as a result of a PTET has been estimated by legislators to be approximately $50 million per year, the election into it would not impact overall Indiana tax paid on the pass-through entity income because of certain Indiana credits that have been included in the bill.

Additionally, SB2 provides updates to Indiana’s credit for tax paid to other states’ statutes, which may offer opportunities for election into other state PTET regimes and potentially creating additional federal savings.

SB2 Timeline

This important and valuable change is highly supported by the Indiana legislature and is being fast-tracked to offer Indiana businesses the opportunity to maximize the federal benefits. It is anticipated that SB2 will be signed into law by Gov. Holcomb in mid-February.

KSM will continue to provide information on this legislation as it becomes available. Should you have questions in the meantime, please reach out to your KSM advisor or complete this form.

*Currently, the SALT cap is $10,000 and is scheduled to expire for tax years beginning on or after Jan. 1, 2026.