Indiana Senate Bill 2 (SB2) was signed into law February 22, 2023. Upon its passage, Indiana joins the increasingly large list of states that have enacted pass-through entity (PTE) tax legislation.
The PTE tax election will have a retroactive effective date of January 1, 2022 and allows for S corporations, partnerships, or LLCs treated as S corps or partnerships for federal income tax purposes to pay Indiana income taxes at the entity level as the 2023 Indiana General Assembly expedited the passage of Senate Bill 2 (SB2), Gov. Holcomb signed the bill into law. SB2 creates an optional state-level pass-through entity tax (PTET) with a retroactive effective date of Jan. 1, 2022.
The Indiana PTET law is written to provide a federal tax benefit for individual taxpayers while being revenue-neutral for the state of Indiana. The creation of a PTET effectively eliminates the $10,000 cap on an individual’s state tax deduction put into place in 2018 by the Tax Cuts and Jobs Act. The IRS is aware of the now 30 states creating these laws and has blessed the deduction of such taxes at the federal level through the guidance issued in IRS Notice 2020-75.
Indiana’s new PTET law is significant for Indiana taxpayers for a number of reasons, including the following:
While it is expected that the election will be beneficial for most Indiana taxpayers, a separate analysis should be done to confirm the benefit. The following is a non-exhaustive list of items that should be considered when analyzing the benefits of PTET elections.
This new law is nuanced, and its widespread implications are still developing. Turpen & Deckard LLC is in discussion both with the Indiana Department of Revenue and software providers to address immediate concerns regarding filing deadlines and timing of elections, neither of which are clear at this time.
TDLLC will continue to monitor any guidance and provide updates accordingly.