Over the past several years, many states have implemented certain taxes on the shareholders and members of various entities. These taxes are often called pass-through entity (PTE) taxes. As a result of the Tax Cuts and Jobs Act (TCJA), New York recently joined the growing list of states that have implemented a PTE tax. Part of the TCJA severely limits the deductibility of state and local income taxes on individuals, and it was enacted to allow individuals to deduct business taxes on their personal income tax returns.
PTE taxes are paid by the entity, however, the members or shareholders are provided the benefit of a deduction or credit on their individual tax return. Since this tax is paid at the entity level, it will directly affect any financial statements produced by such entity. The issue at hand is how to record such payment. Does the payment fall under Accounting Standards Codification 740 (ASC740), which is the U.S. GAAP guidance for income taxes? Or are there different guidelines for recording PTE taxes?
PTE Tax Classification – Attributable to Owners or to Entity
Due to the intricacies of the tax law and the complexities of U.S. GAAP, the classification of the PTE Tax can be confusing. Depending on the laws and regulations of each state’s PTE tax, such amount can either be more aligned with being attributable to the owners or attributable to the entity. If the PTE Tax is essentially more aligned with being incurred on behalf of the owners, then the transaction would be accounted for as an equity transaction. Additionally, in cases where the PTE Tax is more aligned with being attributable to the entity, then the amount would fall under ASC 740, and recognized as an expense. However, these are general scenarios. A full analysis of your particular PTE tax is needed to form a proper conclusion.
Janover can help you and your business analyze and properly record any PTE tax that you may face. Our team of income tax and U.S. GAAP experts can help you navigate this challenging issue.