How the Mississippi Pass-Through Entity Tax Works
Mississippi's PTE tax works as a SALT cap workaround, allowing the entity to pay state tax to create a federal deduction and a state credit for its owners.
The Mississippi Pass-Through Entity Tax was established in response to the 2017 Tax Cuts and Jobs Act, which placed a $10,000 limit on the federal deduction for state and local taxes (SALT) for individuals. This structure allows certain businesses to pay Mississippi income tax at the business level instead of the individual owner level.
This entity-level tax is treated as a deductible business expense on the entity’s federal return, reducing the total income that passes through to the owners. Consequently, owners receive a credit on their personal Mississippi income tax returns for their portion of the tax paid by the business. This mechanism is designed to provide a workaround to the federal SALT deduction limitation.
Eligibility and Election Requirements
The option to be taxed as an electing pass-through entity is available to partnerships, S corporations, and similar pass-through business structures. Fiduciary entities, such as trusts and estates, are not eligible to make this election. The election must be made by an officer, manager, partner, or other individual authorized to sign the entity’s tax returns.
Once made, the election is binding for the tax year it is made and for all subsequent years unless it is formally revoked. This decision applies to the entity as a whole and is binding on all owners, including residents and non-residents.
Calculating the Pass-Through Entity Tax
The calculation of the Mississippi Pass-Through Entity (PTE) Tax begins with determining the entity’s taxable income attributable to the state. This tax base is the entity’s net income or loss that is sourced to or connected with Mississippi. For entities that operate both within and outside of the state, an apportionment formula must be used to calculate the portion of income subject to the Mississippi tax.
Once the Mississippi-sourced income is determined, a flat tax rate of 5% is applied. For example, if an eligible S corporation has $200,000 in income entirely sourced to Mississippi, the PTE tax liability would be $10,000 ($200,000 x 5%).
This calculated tax is the direct liability of the entity itself. The entity is required to provide each owner with a Mississippi Schedule K-1, which details their pro rata share of the tax paid.
Filing and Payment Procedures
To make the election, an entity must file Form 84-381, the Mississippi Pass-Through Entity Election Form, with its main tax return. The return must be filed by the 15th day of the third month after the end of the entity’s taxable year. For businesses using a calendar year, this deadline is March 15th.
Entities can submit returns and payments electronically through the Mississippi Taxpayer Access Point (TAP) portal. Alternatively, payments can be mailed with Form 84-300, the Pass-Through Entity Income Tax Voucher.
If an electing entity’s annual tax liability is expected to exceed $200, it must make quarterly estimated tax payments. The total of these payments must equal at least 90% of the final tax liability to avoid underpayment penalties. Payments are due on the 15th day of the:
- Fourth month of the tax year
- Sixth month of the tax year
- Ninth month of the tax year
- Twelfth month of the tax year
Owner-Level Tax Implications
Owners of an electing entity are entitled to a tax credit equal to their pro rata share of the PTE tax paid by the business. This credit is claimed on the owner’s individual Mississippi income tax return, Form 80-105, and directly reduces their state income tax liability. To validate the credit, the owner must attach the Mississippi Schedule K-1 received from the entity.
The federal tax advantage stems from the tax being paid at the entity level, which is considered a deductible business expense on the entity’s federal return. This deduction lowers the entity’s overall net income.
As a result, the net income passed through to the owners on their federal Schedule K-1 is reduced, which lowers their federal adjusted gross income (AGI). This allows the owner to benefit from a state tax deduction that would otherwise be limited by the $10,000 SALT deduction cap.