State Taxation of Pass-Through Entities: Recent Nexus Developments, SALT CAP Pass-Through Entity Workarounds

Description

Most states follow federal pass-through treatment and tax the individual partners or shareholders. However, many states do not; many impose entity-level taxes. In addition to these taxes, some states impose franchise taxes and fees (CA and NY) and there are local jurisdictions that also impose entity-level and franchise taxes (DC and NYC). Staying on top of the ever-changing state tax structures is a never-ending challenge for SALT practitioners.

First, tax practitioners must determine whether an entity has nexus in each applicable state to determine if filing, registering, or remitting taxes is required. Advisers must consider where the entity was organized, does business, and derives its income (or losses), and the residence of each investor. Business and nonbusiness income need to be identified and separated so that earnings can be allocated or apportioned. Payroll, inventory, and assets must be identified and segregated by state for states using factor-based presence tests.

Additionally, seven states have recently implemented, or are in the process of implementing, entity-level taxes to circumvent the federal SALT deduction CAP. Knowing whether and when to elect in is another--and a new--consideration for SALT advisers and multistate entities. Altogether, the multiple owners, states, taxes, and concerns can be overwhelming for state and local tax preparers.

Listen as our panel of SALT experts explains recent state nexus developments, the most common methods of determining taxable income for partnerships and S-corporations, handling nonresident owners, the current status of states implementing PTE level taxes, and best practices for tracking and determining state taxable income.