As year-end approaches, it’s time to consider planning strategies that may help reduce your business’s taxes for this year and next. Have you considered the SALT Parity Act and Missouri pass-through entity (PTE) election? Here’s what you need to know:
About the SALT Parity Act
This summer, Missouri passed HB 2400, which included a section called the “SALT Parity Act.” The SALT Parity Act allows PTEs (S-corporations and partnerships) to make an election to pay state income tax at the entity level, rather than shareholders/partners paying the tax on their Form 1040 tax returns. Paying the tax at the entity level as a PTE tax allows the business to deduct the state income tax paid rather than subjecting it to the $10,000 SALT limit on the federal Form 1040 Schedule A. The election is available for tax years ending on or after December 31, 2022 (2022 tax year) and can be made when filing the return. The MO-PTE tax will be 5.3% of taxable income (highest individual rate).
As of today, we’re still awaiting additional guidance from the State of Missouri regarding how and when to make the election. There will be an additional Form MO-PTE, which will be filed with the business tax return.
Missouri has said that pass-throughs will not be required to make estimated payments towards their expected PTE tax. However, in Notice 2020-75, the IRS stated that, “if a partnership or S-corporation makes a specified income tax payment during a taxable year, the partnership or S-corporation is allowed a deduction for the specified income tax payment in computing its taxable income for the taxable year in which the payment is made.” In short, PTE tax payments need to be deducted on the cash basis, even if the entity is accrual.
What This Means for You & Your Business
Prior to the filing of your 2022 tax return, you should analyze if making the PTE election to pay state income tax at the entity level would be beneficial. To receive the tax deduction on your 2022 business tax return rather than waiting until the 2023 return, the PTE tax needs to be paid via an estimate voucher prior to December 31.
If you have any questions or would like assistance in calculating a MO-PTE tax estimate to be made prior to December 31 so that it may be deducted on the 2022 tax return, please contact your KPM trusted advisor. KPM CPAs & Advisors can help you leverage potential tax savings strategies or reassess the need for fourth quarter estimated tax payments.