Indiana Pass-Through Entity Tax Update
Indiana Senate Bill 2 (SB2) was signed into law on February 22, 2023. With its passing, Indiana joins the increasingly large list of states that have enacted pass-through entity (PTE) tax legislation.
The PTE tax election will have a retroactive effective date of January 1, 2022 and allow for S corporations, partnerships, or LLCs treated as S corps or partnerships for federal income tax purposes to pay Indiana income taxes at the entity level.
Key takeaways from SB2 include:
- Owners with an interest in an electing PTE will be allowed to claim a refundable tax credit equal to the amount of tax paid by the electing entity with regard to the owner’s share.
- Previous Indiana state legislation has been amended to allow residents to claim a credit for PTE taxes that are imposed by and paid to another state.
- The election is to be made annually on a form or method as prescribed by the Indiana Department of Revenue and will be binding for that tax year.
- For taxable years beginning after December 31, 2022, the election will be made at any time during the taxable year or by the due date of the entity’s tax returns, including extensions. For taxable years beginning after December 31, 2021 and before January 1, 2023, the election must be made after March 31, 2023 and before August 31, 2024.
- The electing entity can choose to determine the resident owner’s share of PTE income either before or after apportionment but must use the same method for all resident owners.
- An electing entity will be subject to the obligation to make estimated tax payments in the same manner as C corps. However, for taxable years ending on or before June 30, 2023, an electing entity is not required to make estimated tax payments. For taxable years ending after June 30, 2023 and on or before December 31, 2024, an electing entity shall make an estimated tax payment for the taxable years on or before the end of the taxable year.
- Eligible PTE owners include direct or indirect owners that are ultimately taxable on the entity’s income. Financial institutions are the only excluded or ineligible owners for PTE purposes.
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