Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

Pass-through Entity Level Taxes - Where are They and How do they Work?

Ever since passage of federal tax reform, a movement toward mandatory or elective entity level taxes on otherwise pass-through entities (PTE’s) was in force in some states. A pass-through tax (PET) is similar to a corporate tax but for LLCs, small businesses, and partnerships. Specifically, pass-through entities are taxed at the entity level rather than the individual level, and then individuals will receive a tax credit against their own personal income taxes, to ensure the income is only taxed once. Why is this a “workaround?” Because, at least under current IRS interpretations, taxes paid by entities are still fully deductible, not subject to a cap.

Nationally, five states have passed “pass-through entity” legislation and at least five more are contemplating it. Let’s look at some of these recent developments, first reviewing the programs in states that have already enacted legislation. Each of the various programs has its nuances.

PET Legislation Enacted in Connecticut, Wisconsin, Oklahoma, Louisiana and Rhode Island


As the first state to enact a PTE-level tax which was publicly touted as a “SALT cap workaround,” Connecticut now levies an income tax on LLCs, partnerships, sole proprietorships and S corporations doing business in the state, effective for tax years beginning on or after Jan. 1, 2018. This law is the only mandatory version of a PTE out there. Individual resident and nonresident owners are allowed a corresponding tax credit against their Connecticut income taxes paid at the entity level. However, the 2019 - 2020 Connecticut budget bill passed June 4, 2019 reduces the value of the offsetting income tax credit by reducing the multiplier used to calculate the credit from 93.01% to 87.5% retroactively to taxable years beginning on and after January 1, 2019. This is somewhat of an odd move, since the whole point to this “PET” was to help taxpayers who were losing out on the SALT deduction as a result of federal tax reform by shifting the burden on state income tax to their partnership or other pass-through entity. But now, by reducing the credit available to the individual taxpayer for the tax paid by the entity, Connecticut appears to be using this PET tax as a way to also increase revenue.

The Connecticut Department of Revenue also announced recently here that it is automatically waiving late payment penalties and related interest on PTE’s for their 2018 tax returns provided that the total tax due is paid within one year of the original due date.

For more nuts and bolts on this Connecticut tax, check out this article written by two of my favorite authors.


Senate Bill 883, which was signed into law on December 14, 2018, allows for an elective pass-through entity tax program in Wisconsin whereby entities treated as partnerships for federal income tax purposes, plus S corporations (generally referred to as “tax-option corporations” by Wisconsin) are allowed to elect to pay tax at the entity level. The election became available for S corporations and LLCs taxed as S corporations effective January 1, 2018, and for entities taxed as partnerships effective January 1, 2019.

Specifically, if consent is obtained from the persons who hold more than 50 percent of the capital and profits of a partnership or shares of an S corporation, then the partnership or S corporation may elect to be taxed at the entity level at a rate of 7.9% of net income reportable to Wisconsin. Notably, this rate is higher than the top marginal individual income tax rate of 7.65%. The election must be made annually on or before the due date, or the extended due date if applicable, of the entity’s return. If the owners decide to revoke an election, that must also occur on or before the due date, or the extended due date if applicable, of the entity’s return.

Like other PTEs, the general effect of making the election is that the income is taxed at the entity level and is not taxed again at the individual level, as the individual owners will be allowed a subtraction from Wisconsin adjusted gross income for the owner’s share of income or gain from the partnership or S corporation. Also, a particular owner who receives a loss or deduction allocation from the partnership or S corporation would need to add back these amounts.

This credit will not be allowed unless the income taxed by the other state is also considered income for Wisconsin tax purposes and is attributable to amounts that would have been reported to Wisconsin by owners of the partnership or S corporation if the election had not been made. Other than for income taxed by states that border Wisconsin, the entity’s credit for taxes paid may not exceed an amount equal to 7.9% multiplied by the income subject to tax in another state that is also subject to tax in Wisconsin.


H.B. 2665 enacted the Pass-Through Entity Tax Equity Act of 2019 (68 O.S. § 2355.1P-1 et seq.) on April 29, 2019 which allows certain pass-through entities, those required to file either an Oklahoma partnership income tax return or an Oklahoma S corporation income tax return, to elect to pay income tax at the entity level, effective for tax year 2019 and subsequent tax years. The tax is calculated by multiplying each PTE owner’s distributive or pro rata share by their applicable tax rate: the highest individual marginal rate (currently 5%); 6% for corporations, pass-through entities, or financial institutions; or for exempt organizations, the highest marginal rate that would apply to any item of the electing pass-through entity’s income or gain absent the election, and then aggregating the result.

Oklahoma Tax Commission Form 586 is used to notify the Oklahoma Tax Commission that a qualifying entity is electing, or revoking the election, to become an electing PTE. For tax year 2019, the Form 586 had to be filed no later than June 28, 2019. The election to become an electing PTE has priority over and revokes any election to file a composite Oklahoma partnership return or the requirement of an S corporation to report and pay tax on behalf of a nonresident shareholder for the same tax year. An election made by one electing PTE is not binding on any other electing PTE. Each electing PTE must make its own election. This election is binding until revoked by the electing PTE or by the Oklahoma Tax Commission (OTC). The electing PTE may revoke the election by completing Part 2 of OTC Form 586. If the amount of tax required to be paid by the PTE pursuant to the provision of this Act is not paid when due, the OTC may revoke the PTE's election effective for the first year for which the tax is not paid.

The OTC will issue an acknowledgement letter for all pass-through entities that have elected to become an electing PTE.  Each electing PTE must provide its shareholders, members or partners a copy of the OTC acknowledgement letter and advise the shareholder, member or partner of the requirement to attach a copy of the acknowledgement letter to his Oklahoma income tax return.


Louisiana Senate Bill 223 was signed by Governor John Edwards and became effective on June 22, 2019. The bill allows S corporations or any other entities taxed as partnerships for federal income tax purposes to elect to be taxed as if the entity were a C corporation for Louisiana income tax purposes. The election is retroactively effective to tax years beginning on or after January 1, 2019 and is due by the 15th day of the fourth month after the close of the taxable year but may be made at any time prior to the deadline. Late elections may be allowed by the state at its discretion.

Once elected, the business is bound to be taxed as a C corporation for all subsequent tax years. This will continue until the election is terminated by the secretary of revenue. Taxpayers may apply for termination of the election if more than half of the owners consent to the termination. The secretary may terminate an entity’s election depending on material changes in circumstances; however, terminations of the election are not automatically granted.

Tax will be calculated by the elected pass-through entity as a whole (rather than on each member or partner’s share) using the following schedule of rates:

  • 2% of the initial $25,000 of Louisiana taxable income
  • 4% of Louisiana taxable income between $25,001 and $100,000
  • 6% of Louisiana taxable income in excess of $100,000

Louisiana law currently requires S corporations to pay income tax at the corporate rates of 4, 5, 6, 7 and 8 percent on all taxable income in excess of $200,000 (if not making a special election available to S corporations that allows income and losses passed on to shareholders to be excluded). In the calculation of Louisiana taxable income, a pass-through entity is allowed a deduction for the amount of federal income tax it would have paid on its net income if the entity were taxed as a C corporation for federal income tax purposes. Individual shareholders, partners or members should exclude from Louisiana taxable income their share of income or loss received from the pass-through entity.

Rhode Island

On Feb. 27, 2019, H.B. 5576 and companion bill, S.B. 564, were introduced and both would allow a PTE to elect to pay an income tax at the entity level at a 5.99% tax rate. The proposal was later rolled into the omnibus budget bill, H. 5151A, that Governor Gina Raimondo signed into law on July 5, 2019. It is effective for tax years beginning on or after January 1, 2019. Under the Rhode Island legislation, an eligible pass-through entity may voluntarily elect to pay Rhode Island state income tax at the entity level at the rate of 5.99%.

The new law defines “pass-through entity” as a corporation that for the applicable tax year is treated as a subchapter S corporation under Internal Revenue Code (IRC) Section 1362(a), or a general partnership, limited partnership, limited liability partnership, trust, limited liability company or unincorporated sole proprietorship that for the applicable tax year is not taxed as a corporation for federal income tax purposes. The election is made annually by filing the prescribed tax form and remitting the appropriate tax due. If a pass-through entity makes such election, the pass-through entity no longer needs to comply with the statutory provisions regarding withholding on nonresident owners.

Pass-through entities electing to be taxed at the entity level must report the following:

  1. The pro rata share of the state income taxes paid by the entity, which sums will be allowed as a state tax credit for an owner on his or her personal income tax return
  2. The pro rata share of the state income taxes paid by the entity as an income (addition) modification to be reported by an owner on his or her personal income tax return

The individual owners of the electing pass-through entity may take a state tax credit on their Rhode Island personal income tax return for their pro rata portion of the entity level tax paid. An individual owner may also take a credit for similar entity level taxes imposed and paid to other states.

At Least Five States Are Considering Pass-through Legislation 


On March 5, 2019, Governor Gretchen Whitmer proposed a SALT cap workaround for PTEs that was eventually incorporated and introduced on June 26, 2019. The bill which was referred to the Committee on Tax Policy, would increase the PTE tax from a 4.25% income tax imposed at the individual level to an 8.5% tax imposed at the PTE level, with a corresponding individual tax credit, effective in 2020. The state corporate income tax rate would also increase to 8.5% under the bill. However, the legislation was not passed. A year prior to that, the Michigan Legislature passed a proposed PTE law that was vetoed by then-Governor Rick Snyder on Dec. 28, 2018. That plan would have created a new state tax on “Pass-through” entities of 4.25% to be paid in lieu of the Michigan individual income tax.


Similar to several other states’ bills, S.F. 304 would allow certain federal PTEs to make a four-year election to file as a state C corporation. According to the bill, for pass-through businesses (LLCs, partnerships, and S corporations), income tax is imposed on the members, partners, or shareholders at the individual level, while C corporations pay corporate franchise tax at the entity level. This bill establishes an election for pass-through entities to file as C corporations for Minnesota tax purposes, effective beginning in tax year 2019. The effect of the election is that the business’s income is taxed at the entity level for state purposes.

Individual members, partners, and shareholders would pay state individual income tax on their share of income received from the qualifying entity, but would subtract income received from the qualifying entity for purposes of calculating federal taxable income. A qualifying entity would also claim a credit against Minnesota income tax for taxes paid to another state on its composite return. At the federal level, a qualifying entity could subtract its Minnesota taxes paid, resulting in reduced net income for the business. This reduced amount is then apportioned among members, partners and shareholders based on their interest in the business.

The Senate Committee on Taxes held a hearing on the bill on March 14, but the legislature adjourned in the meantime.

New Jersey

On March 18, 2019, New Jersey lawmakers referred S.B. 3246 and its companion, A.B. 4807, to create an elective entity-level tax on PTEs, to the respective Appropriations Committees. If a PTE were to elect to be taxed as a state C corporation under the bill, the owners would be entitled to claim a refundable gross income tax credit. The bill would establish four tiers of tax rates, beginning at 5.525% if the distributive proceeds of the PTE are less than $250,000 annually, and increasing to 10.75% if the distributive proceeds exceed $3 million. If enacted, the legislation would be retroactive to tax years beginning on or after Jan. 1, 2018. The legislation is similar to that of Oklahoma and Louisiana.


H.B. 1714 was introduced March 6, 2019 in the Arkansas State House and would provide a workaround for individual owners of PTEs whose state and local taxes exceed the $10,000 federal deduction cap. This proposal mirrors the Wisconsin legislation but is not an exact replica. The bill would allow specified PTEs to deduct their state and local taxes, just as C corporations currently do. The bill died at the end of the 2019 session after it was recommended for study in the interim by the Joint Interim Committee on Revenue and Taxation. It may resurface in the next few sessions especially because neighboring states Louisiana and Oklahoma have already adopted PTE legislation.

New York

The state has not officially proposed any formal legislation but, in early 2018, it did release a "Bill Discussion Draft" outlining what a possible “Unincorporated Business Tax” would look like. Since that time, though, efforts to push forward legislation have stalled, and at least at this point it’s not clear whether there’s much interest in pushing forward with such a tax. We’ll know more in January 2020, when the Governor releases his new budget and outlines proposed new tax legislation.


Of course, the $64,000 question is whether these things actually work! And the answer, at least at this point, is a solid maybe. The IRS has directly attacked and effectively shut down the other major workaround proposed by many states involving the “creative” use of state-run charitable organizations, but has been silent on these kinds of pass-through taxes, as outlined in this Law360 piece published a few weeks ago. That’s probably a good sign for these states and, in any event, one would expect any changes in interpretation by the IRS would be prospective only. Indeed, even the IRS’s efforts to shutdown the charitable workarounds had a prospective effective date. So for now, it appears these workarounds will work!

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