At the beginning of January, Indiana Senate Bill 2 was introduced, which allows for pass-through entities with Indiana residents to elect to pay the owner’s Indiana income taxes directly at the entity level.
This Pass-Through Entity (PTE) tax would allow owners of Indiana pass-through entities to deduct their Indiana state tax liability attributable to the pass-through entity against ordinary federal income, even if the state tax is greater than the current $10,000 SALT limitation on individual tax returns. The bill allows for a retroactive election to be made effective Jan. 1, 2022.
On Feb. 20, 2023, this bill was approved by state legislators and was signed by Governor Holcomb that same week.
2022 Tax Filing Impact – Cash Flow and Patience
While this election will reduce future federal tax liabilities, the logistics of accomplishing this for 2022 tax returns will require additional cash and patience.
Indiana is still targeting a March 31, 2023, system implementation date, which means taxpayers should expect filing delays as well as refund delays.
Cash flow also needs to be considered. If the pass-through entity election is made for 2022, it will require the business to pay income taxes that may have already been paid by the owners. This will generally create a significant refund at the individual level that is likely to be delayed because of the backlog this bill will create for the Indiana Department of Revenue.
Next Steps
Businesses are encouraged to provide their financial information to their tax advisors as soon as possible to see if the PTE election is right for them.
Phone: (260) 969-2513
Email: mbradberry@badencpa.com
