We wanted to reach out to you regarding a pending Indiana legislation that we are monitoring, Senate Bill 2, that can provide a beneficial planning opportunity for S-Corporations, Partnerships, and their owners.
This proposed bill authorizes certain pass-through entities to make an election (for tax years after December 31, 2021) to pay Indiana income tax at the entity level based on each owner’s aggregate share of adjusted gross income. It also provides a refundable tax credit equal to the amount of tax paid by the electing entity with regard to the owner’s share.
The benefit of the tax pass-through entity is that it permits pass-through entity shareholders or partners to obtain a tax deduction for state taxes that would otherwise be limited by the federal $10,000 SALT cap that currently applies to individuals after the Tax Cuts & Jobs Act passed in 2017. This law change results in the owners of eligible entities being able to deduct a larger portion of their state income taxes paid than they otherwise would against federal income.
The bill also allows a credit for pass-through entity taxes that are imposed by and paid to another state. This may allow for additional state credit opportunities related to other state pass through entity tax regimes.
Impact to the Filing of 2022 Tax Returns
The proposed bill is retroactive and applies to taxable years beginning after December 31, 2021, which includes 2022 calendar year tax returns.
The 2022 election must be made after March 31, 2023, which is after the original due date of the pass-through entity’s federal income tax return (March 15, 2023). Therefore, extensions may be needed for 2022 tax pass-through entity tax returns that will potentially consider making the pass-through entity election to allow for our team to evaluate the potential advantages and disadvantages of making the election. In addition, Indiana will need to provide instructions to taxpayers on the form and manner in which the election is made along with updating the tax forms to claim the pass-through entity.
The Bill is being expedited through the Indiana legislature and expected to pass in mid-February. Please be on the lookout for additional updates from us in the coming days.