Key insights
- State nexus often exists before you realize it: Remote partners, partner travel, and client based sourcing can create filing obligations in new states — even if your firm doesn’t have an office there.
- PTET rules vary widely, and differences in eligibility, credit mechanics, and owner profiles can change whether an election actually pays off.
- Market based versus cost of performance sourcing directly affects apportionment, PTET calculations, and the credits owners can claim.
- Once nexus is established, your firm may have new state filing requirements, which in turn drive whether a PTET election is available and beneficial.
Review state nexus to support smarter PTET decisions.
Pass‑through entity taxes (PTET) have quickly become one of the most valuable tools for professional services firms seeking relief from the federal state and local tax deduction cap.
For many multistate partnerships and S corporations, PTET elections can generate meaningful tax savings, but only when firms fully understand how these elections interact with state nexus rules and filing requirements.
How nexus rules create PTET opportunities and risks
Professional services firms face unique nexus challenges because their core activity — delivering services — is inherently mobile. Nexus can be triggered by far less than many owners expect.
A single employee or partner working remotely in another state, a partner traveling to perform billable work, or even revenue sourced to a client’s location can create a filing obligation. Many states now apply economic nexus standards, meaning that exceeding a revenue threshold, even as low as $100,000, can require an income tax return even without physical presence.
These triggers frequently arise before firms formally track them, which can lead to unexpected filing obligations and missed PTET planning opportunities.
Remote workers, traveling partners, and client‑based sourcing can create filing obligations long before firms realize it — changing both compliance needs and PTET planning potential.
State requirements affect the PTET benefit
Once nexus is established, PTET becomes part of the strategic conversation. States vary widely in how they structure their PTET regimes.
Election and eligibility rules differ as well. Certain states require upfront PTET elections while other states allow the election when the tax return is filed. Under eligibility rules, publicly traded partnerships and tiered entities may be excluded.
Credit mechanisms also vary with some states offering a dollar‑for‑dollar credit to owners, while others provide only partial relief, which can affect the net benefit of making the election.
Apportionment and sourcing can change the outcome
Apportionment rules add another layer of complexity. States may source service revenue based on where the benefit is received (market (client)‑based sourcing), where the service is performed (cost‑of‑performance), or a hybrid approach.
These sourcing rules directly influence both the PTET calculation and the resident‑state credit available to owners. For multistate firms, inconsistent sourcing rules can lead to double taxation if not carefully planned.
Turning filing requirements into tax savings
Given the rapid expansion of remote work and the growing adoption of PTET regimes, professional service firms must take a proactive approach. Regularly reviewing where employees and partners work, how services are delivered, and how revenue is sourced can help firms identify nexus early and evaluate whether a PTET election is advantageous.
With thoughtful planning and ongoing monitoring, PTET can shift from a compliance burden to a strategic tax‑saving opportunity.
What professional services firms should review regularly
- Where employees and partners are physically working
- States where revenue thresholds may trigger economic nexus
- PTET eligibility rules in each filing state
- How service revenue is sourced for apportionment
- Whether owner‑level credits fully offset the entity‑level PTET
How CLA can help with state nexus and PTET planning
Firms with multistate operations often benefit from stepping back and reviewing nexus exposure alongside PTET elections, especially as work patterns continue to shift. Periodic check‑ins can help surface savings opportunities.
CLA can help you evaluate where filing requirements exist for your firm, how services and revenue are sourced, and whether PTET elections align with owner profiles and multistate activity. Our team helps firms:
- Identify and monitor state nexus created by remote work, travel, and client activity
- Review state filing requirements and PTET eligibility across jurisdictions
- Assess how sourcing and apportionment affect PTET calculations and owner‑level credits
- Revisit PTET elections as work patterns, ownership, and state rules change
Contact us
Review state nexus to support smarter PTET decisions and reduce filing surprises. Complete the form below to connect with CLA.