What Is the 740-PTET Pass-Through Entity Tax Election?

The Pass-Through Entity Tax (PTET) election allows certain businesses to pay state income tax at the entity level. This strategic choice emerged as a response to the 2017 Tax Cuts and Jobs Act, which placed a $10,000 cap on the federal deduction for state and local taxes (SALT) for individuals. By shifting the tax payment from the individual owners to the business entity itself, the state tax payment becomes a deductible business expense for federal purposes, effectively bypassing the individual SALT cap. This mechanism provides a way for owners of pass-through businesses to receive a full federal deduction for their state income tax payments attributable to the business’s income.

Eligible Entities for the PTET Election

The ability to make a PTET election is available to specific types of business structures. Any entity required to file a state partnership income tax return or a state S corporation income tax return is eligible. This includes partnerships, limited liability companies (LLCs) taxed as partnerships, and S corporations.

Eligibility often extends to entities owned entirely by a specific class of members, such as individuals, estates, or trusts. Some states may also permit ownership by other pass-through entities. The election made by one entity is distinct and does not automatically apply to any other related or commonly owned entities; each business must make its own separate election.

This election holds precedence over other state tax filing options. For instance, making the PTET election revokes any prior election to file a composite partnership return or the requirement for an S corporation to pay tax on behalf of its nonresident shareholders for that same tax year. The decision to elect is binding for the tax year it is made and remains in effect until it is formally revoked.

Required Information and Tax Calculation

To complete a PTET return, an entity must gather detailed information for the business and its owners. This includes the entity’s legal name, Federal Employer Identification Number (FEIN), and principal business activity code. For each owner, partner, or shareholder, the entity needs their full name, Social Security Number or Taxpayer Identification Number (TIN), and their specific ownership percentage or distributive share of the entity’s income.

The calculation of the PTET begins with the entity’s total income and requires state-specific adjustments. The entity must determine its Oklahoma net entity income, which involves applying various additions and subtractions as dictated by state law. The resulting taxable income is then multiplied by the applicable tax rate to determine the total PTET due.

The tax rate itself can vary depending on the type of owner receiving the income. For example, in Oklahoma, income distributable to individuals, trusts, or estates is taxed at the highest marginal individual income tax rate, which is 4.75%. Income attributable to corporate members is taxed at the corporate income tax rate of 4%.

This dual-rate structure requires careful allocation of income to each owner. For non-resident owners, income must be apportioned to the state based on the entity’s business activities within that state.

Election and Filing Process

Making the PTET election is accomplished by the timely filing of the appropriate form, such as Oklahoma’s Form 740-PTET, by its regular or extended due date. Entities can submit the completed PTET return and associated payments by mail or through a state’s online tax portal for electronic filing.

The deadline for filing the annual PTET return and paying any tax due aligns with the standard income tax return deadlines for partnerships and S corporations. If the entity’s estimated annual tax liability exceeds a certain threshold, such as $500, it is required to make quarterly estimated tax payments.

These 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

Payments can be made via electronic funds transfer or by mailing a check with the appropriate payment voucher.

Tax Credit for Entity Owners

After the entity pays the PTET, the owners receive a direct benefit on their personal state income tax returns. The tax paid by the PTE generates a dollar-for-dollar tax credit for its shareholders, partners, or members. The entity is responsible for reporting each owner’s share of the tax paid on a state-specific schedule, which functions similarly to a federal Schedule K-1. This document provides the owner with the exact amount of the credit they are entitled to claim.

Owners claim this credit on their individual state income tax returns, for example, on Oklahoma’s Form 511. The entity must provide its owners with a copy of the state’s PTET election acknowledgment letter, which the owner must then attach to their own state tax return as proof of eligibility for the credit.

To prevent double taxation, owners must also make an income adjustment on their state returns. They are required to subtract their distributive share of the entity’s income from their state adjusted gross income, as this income has already been taxed at the entity level.