Business Owners: Pass-Through Entity Taxation May Be Going Away
For business owners looking to maximize their tax savings, now may be the time to take advantage of a crucial opportunity. Staying ahead of tax changes is an essential strategy.
Pass-through entity taxation (PTET) is an effective way for business owners to reduce taxable income, but time is of the essence. The current rules may not be around for much longer due to potential policy shifts and the impact of the recent election cycle.
What is PTET and who does it affect?
Pass-through entities are business structures in which income, deductions, and credits flow—or “pass-through”—to the owners or investors, bypassing corporate income tax. This means the business itself avoids federal corporate taxes, while the owners report the income on their personal tax returns, subject to individual income taxes.
These business structures may include partnerships, S corporations, and certain LLCs that choose pass-through treatment for tax purposes. Businesses in this group have the option to elect pass-through entity taxation, which can help mitigate the $10,000 state and local tax (SALT) deduction cap by allowing the entity to pay taxes at the state level.
However, this rule is set to sunset at the end of 2025, and based on the 2024 election cycle, this may be your business’s last chance to make entity-level payments and utilize this tax strategy.
What are the benefits of PTET?
PTET offers business owners a way to lessen the impact of the SALT deduction cap on their federal taxes, potentially lowering tax liability. By allowing the entity itself to pay state taxes, PTET can reduce taxable income, so you’ll owe less come tax season.
The single layer of taxation that PTEs provide can also be very useful for business owners. They avoid the double taxation faced by C corporations, where income is taxed at both the corporate and individual levels. Additionally, any losses incurred by the business can offset the owner’s overall taxable income, which may further lower tax liability.
Why act now?
The PTET rule expires on December 31, 2025. It is highly unlikely to be renewed or extended.
Some political candidates in the recent election have proposed adjustments to self-employment taxes, which could directly impact sole proprietors and partners. Additionally, the 2017 Tax Cuts and Jobs Act is set to expire at the end of 2025, and its future is uncertain. These potential changes, along with possible shifts in IRS funding and tax enforcement, could affect PTETs’ benefits and requirements.
How Squire can help?
Staying ahead of these changes by planning proactively can help protect your business’s tax position now and in the future. Acting now in this time-sensitive period, while current tax laws are in place, may offer significant benefits for your business.
At Squire, we pride ourselves on being forward-thinking. We’re committed to helping you take advantage of every available opportunity to save on taxes. Let us help you navigate these changes and maximize your deductions before your window closes. Reach out to our team of award-winning tax professionals by visiting this link.