Key insights
- Pass-through entities should determine whether PTETs are attributable to owners or the entity, since that distinction can affect whether taxes are accounted for as equity transactions or under ASC 740.
- Mandatory and elective PTET regimes can create different timing and measurement considerations for current and deferred tax effects in financial statements.
- Jurisdiction-specific PTET rules — including election requirements, loss or credit carryforwards, and owner-level attributes — can add complexity to U.S. GAAP reporting.
Need help accounting for your pass-through entity taxes?
Pass-through entities electing to pay tax at the entity level may now need to consider U.S. GAAP implications. Learn certain considerations and complexities that could surface, including if your taxes need to be accounted for under ASC 740.
A history of the deduction limit
How to attribute pass-through entity taxes (PTET)
- For financial reporting purposes, the PTET could be treated as a distribution/equity transaction.
- For tax return purposes, the pass-through entity may be able to take a deduction against federal taxable income for state and local taxes imposed on the entity.
How to determine if a PTET is attributable to its owners or the entity
- Are the pass-through entity owners permitted to file a tax return and claim the payment(s) of tax by the entity against owner income taxes?
- Is the tax base of the pass-through entity computed by income or loss of the entity or the attributes of its owners?
- Is the pass-through entity liability joint and severally liable by the owners of the pass-through entity?
- Are the laws and regulations such that the taxes paid by the entity are on behalf of its owners?
Explore more: How nexus rules create PTET opportunities and risks
Complexities of ASC 740 and PTETs
If it’s determined a taxing jurisdiction’s PTET is attributed to the entity, and therefore within the scope of ASC 740, entities should evaluate the requirements for related current and deferred tax effects recognized within the financial statements.
Management should also evaluate whether there are factors that could impact the timing of recognition and measurement — including whether the PTET is mandatory vs. elective, if elective, for what period(s) of time, and requirements for revocation of an election, among other factors.
If an income tax is mandated by statute, the related tax effects should be recognized in the period including the enactment date. Any relevant deferred taxes should be measured at the enacted tax rates at which they are expected to reverse.
The challenges if PTET is an election
Additional complexities may arise if the PTET is an election. Certain jurisdictions permit entities to elect to be subject to a PTET for certain period(s) — typically a single annual period.
The PTET election is generally effectuated with or by the timely filing of the entity’s tax return and typically doesn’t require approval or review of the relevant taxing authority. In these instances, a question arises as to the proper timing or tax year to account for the PTET within the financial statements.
One view may be that the pass-through entity is a change in tax status by analogy and, should be accounted for when the PTET election is filed (if no tax authority approval is necessary). This view may preclude an entity from recognizing deferred income taxes if the election is on an annual basis (i.e., the effective date of the election doesn’t exceed one year).
Another view may be to account for the PTET election within the financial statements once management has developed and can support its intent and ability to do so. This view would also contemplate future intended PTET elections.
Other complicating factors of ASC 740 and PTETs
Other complicating factors might include:
- PTET regimes that are only in effect when an entity is in a taxable income position
- Accounting for estimated tax payments made by an entity prior to the effective date of accounting for the PTET as an income tax of the entity
- Jurisdictions computing PTET based on the income attributable only to owners who have elected to be subject to the PTET
- Realizability of any deferred tax assets, if applicable
- Certain PTET regimes permitting loss or credit carryforwards that may only be realized by an entity’s current or future taxable income under the PTET regime
- Election and revocation requirements as enacted by each taxing authority
How CLA can help with pass-through entity taxes
PTET elections can create a wide variety of complexities within financial statements. Our dedicated team of ASC 740 professionals can work closely with you to assess your facts and circumstances and further analyze the potential financial statement impacts of PTETs.