Note: The IN Department of Revenue has a dedicated email for submission of the PTET election forms — PTETelectionform@dor.in.gov. This email address is ONLY for submission of the election forms.

We will post Senate Enrolled Act 2: Taxation of Pass-Through Entities (SEA 2) FAQs on this page as DOR creates guidance. Post your additional questions on the INCPAS Open Forum.

Disclaimer: FAQs are generated from members, discussion panelists and working group teams. Responses may be an individual’s interpretation or perspective, and are not considered official guidance. Members are encouraged to verify information with tax authorities.

Basic provisions of SEA 2:

How do you treat clients with fiscal years for purposes of when a business can elect PTE ? For example, I have several entities that are 9/30 year ends.
SEA 2 says “for taxable years beginning after 12/31/2022” so they would be eligible with their tax year beginning 10/1/2022. If they were 9/20/22, no. But, 9/30/23, yes.

What is the purpose of this elective tax?
The intent of the PTE Tax is to create a federal deduction for state taxes that runs through Schedule E of a 1040 instead of Schedule A.  SEA 2 is structured to conform to the terms of Notice 200-75 wherein the IRS concluded this was an acceptable approach.  Thus, instead of a Schedule A deduction subject to the $10,000 cap on state taxes, the deduction on Schedule E is not limited.

Who should consider making the election?
Anyone with state and local taxes above the $10,000 cap could benefit from the election. A good “rule-of-thumb” for computing the benefit is 1% of the PTE income, which assumes a federal tax rate of 30%+/- applied to a deduction at 3.23%. PTE income of $40,000 will likely save $400 of federal tax; $100,000 should save $1,000, etc. Actual savings will depend on the owner’s federal tax bracket, whether the PTE income is subject to self-employment taxes, and whether the income is considered “qualified business income” under IRC § 199A. 

Of course, there is a cost to making the election: computation of amounts, analysis of the impact, additional forms, extensions might be needed, amended returns might be required, etc. For this reason, it seems likely there will be a net benefit only for incomes in excess of $100,000.

Who can make the election? Can a single-member LLC that is reported on Schedules C or E make the election?
The election may be made by any passthrough entity subject to Subchapters K or S or the Internal Revenue Code. Thus, while a single-member LLC meets the definition of a “pass through entity” under IC 6-3-1-35, it cannot make the election because it is not subject to either Subchapter K or S.

Is the election tied to the sunset of the $10,000 cap? In some states, the PTE tax election applies only if the federal cap is in effect.
No, the Indiana elective PTE tax remains available regardless of the federal limitation. While taxes on PTE income are deductible on Schedule A after the cap expires, there may be no tax benefit because of the alternative minimum tax (AMT), which disallows all state taxes deducted on Schedule A. If you expect to be in AMT, the PTE tax election could still be beneficial.

When is the election made?
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.  For taxable years beginning after December 31, 2022, the election may be made at any time during the taxable year or not later than the earlier of the date the return is due (including extensions) or the date the return is filed.

Can you make the election on an amended return?
For the 2022 tax year only, if the entity filed its return on or before April 18, 2023, the election may be made on an amended return.  If an entity extends its 2022 return and files it later in 2023 without making the election, an amended for purposes of making the election is not allowed.

How will the PTE communicate the credit to owners? How will individuals/partners know if the PTE has taken the election?
The Department’s instructions indicate the PTET credit should be reported on the Schedule IN K-1 on the same line for state taxes withheld (Schedule IN K-1, Part 2, Line 11). The PTE will need to inform owners that the PTET was elected, and the amount shown on Line 11 is not withholding but the share of the PTET. PTEs will need to determine how best to communicate this to owners. For example, it might be a partner letter attached to the K-1.

How is the election made?
Please see DOR's instructions and IN PTET form.

Will DOR accept a digital signature on this election form?
Per the Department of Revenue, a digital signature will be acceptable in the same manner as other forms.

Per the IN-PTET form instructions, it appears this form is to be mailed to the DOR. Should it also be attached as a PDF to the e-filed Indiana IT-65 / IT-20?  
The PTET election form should not be attached to the PTE's return. Most of the software providers do not have this functionality and DOR is unable to process it as an attachment for 2022. The form should be mailed to DOR. The IN Department of Revenue has a dedicated email box for submission of the PTET election forms: PTETelectionform@dor.in.gov

How should the pass-through entity tax payment be submitted? Does the payment get submitted with a post filing coupon (PFC) or Form IT-6WTH?
The PTET payment can be made with the IT-6WTH or with the PTE return.

When is the payment due? The instructions address making estimated tax payments but do not provide direction regarding the 2022 tax payment.
The PTET due dates are technically the same as the composite tax due dates, but penalties and interest have been waived for 2022 so full payment can be made with the PTE return even if it is extended or amended.

In our tax software (Lacerte) we created a test partnership and were able to generate a Schedule Composite and PFC. What information actually gets reported in each column? The majority of our business clients only have Indiana income and Indiana owners.

Instructions on page 7
If an entity is electing to be subject to Pass Through Entity Tax, the entity must list "PTET" on Line 1 of Schedule Composite as the name of the entity. It should not enter an exception code on Line 1, Column A. The entity should list the state of its commercial domicile in Line 1, Column B. Column C should include one of the following codes if Pass Through Entity Tax is computed at the applicable tax rate (3.23% for pass-through entities whose tax year ends in 2022 or 3.15% for pass-through entities whose tax year ends in 2023)

Instructions on page 8
Instructions for Completing Remaining Lines on Schedule Composite On line 1 of the Schedule Composite, enter zero (0) in Columns D through G. For each direct owner subject to Pass Through Entity Tax, enter the owner’s name. For Column A, leave the column blank unless one of the following occurs:

• The owner is an Indiana resident. Enter "15" in column A.

The instructions on page 7 include unique provisions for line 1 of the composite schedule in order to give the Department information needed for processing the PTET. Starting with line 2, the instructions on page 8 explain how to report the PTET for each owner.

How do you determine the amount of income subject to the PTE tax?
SEA 2 added IC 6-3-1-3.5(g) to define “adjusted gross income” for purposes of the PTE tax and composite tax.  Essentially, it is the amount shown on Line 10 of the Indiana K-1, which represents the owner’s share of all items from the federal, including guaranteed payments, and Indiana modifications.  For a resident owner, this amount represents the share before allocation and apportionment.  In lieu of using the Line 10 amount for residents, the PTE may elect to re-determine it after allocation and apportionment.

Why would a PTE use the amount before apportionment or after apportionment? What is the difference?
PTEs doing business within and without Indiana should compute an apportionment factor under IC 6-3-2-2(b) to apply against business income.  Non-business income is allocated to specific states based on rules in IC 6-3-2-2(g) – (k).  If the PTE has only Indiana resident owners, this computation is often skipped as the PTE is required to report the full federal amounts on the Indiana K-1 for resident owners.

If a PTE files in another state that imposes a tax on the owners, or allows a similar elective PTE tax, computing the Indiana PTE on the full income will likely result in an overpayment of Indiana tax after applying the credit for taxes paid to other states.  It may not make sense to pay in Indiana PTE to have it refunded later.

What tax rate is used for computing the PTE tax? Does it include local (county) income taxes?
The tax rate is the Indiana adjusted gross income tax rate in effect on the last day of the PTE’s taxable year.  Thus, for 2022 calendar year entities, the rate is 3.23%.  For PTEs with a fiscal year ending in 2023, the rate is 3.15%.  Local taxes are excluded from the computation.

Which owners’ income is included in the computation of the PTE tax?
All owners are included in the computation of the tax, except for certain financial institutions described in IC 6-2-2-2.8(3) and (5), or any other entity as determined by the Department and listed in instructions or guidance issued by the Department. Pending such guidance, insurance companies subject to premium tax and exempt organizations would be included.

Are estimated payments required for the PTE tax?
Estimated payments are not required for PTE taxable years ending on or before June 30, 2023.  For taxable years ending after that date and before December 31, 2024, a single estimated payment equal to at least 50% of the PTE tax liability must be made on or before the end of the taxable year. For taxable years ending after December 31, 2024, estimates are due quarterly based on the PTE’s tax year. The estimates must exceed the lesser of 80% of the current year tax or 100% of the prior year’s tax.

How does the PTE tax affect the resident owners’ estimates or withholding? Can estimates paid by individual owners or withholding from wages be applied against the PTE tax?
Owners remain subject to the estimated payment requirements but may consider the PTET credit in their individual analyses of the amount due. Any estimates paid by owners or withholding from wages may not be applied against the PTE tax liability. The PTE must remit the tax directly, which may result in overpayments.

Will owners be required to make estimated payments of local (county) tax?
Yes, but depending on the particular facts, the PTET credit may eliminate the need to make actual estimates.

Assume PTE ABC does business in Indiana (50%), Illinois (30%), and Florida (20%).  ABC makes the PTET elections in Illinois and Indiana, using pre-apportioned income for the latter.  Ms. Smith, an Indiana resident living in Hamilton County, has $200,000 of modified Indiana adjusted gross income and $60,000 of Illinois income. Her Illinois PTET credit is $2,970 ($200,000 x 30% x 4.95%), and the Indiana PTET credit is $6,460 ($200,000 x 3.23%). She has no other income and pays $5,000 in Indiana property taxes on her principal residence. Her Indiana tax computation is as follows:

In this situation, the credit for IL tax lowers the Indiana tax, which allows $1,938 of the PTET credit to be applied against the local tax, eliminating the need for estimated payments. (See Information Bulletin #3.) A similar impact results if the PTE passes through REC or other credits- or the owner has direct state tax credits. While these credits do not directly reduce local tax, by lowering state tax, the PTET credit is available to be applied against any other tax shown on the IT-40.

How will nonresidents pay local (county tax)?
To the extent local tax applies to a nonresident PTE owner, the local tax would be paid through the composite return. In determining applicability of local tax, note that the nonresident’s principal source of business income or employment must be in a single Indiana county. See Information Bulletin #72.

How does the PTET election impact the mandatory composite return?
Electing PTEs with non-resident owners remain subject to the composite return requirements of IC 6-3-4-12(i) and IC 6-3-4-13(j); however, the PTET credit may be applied on the composite return, reducing the need for additional payment. (Because the credit is equal to the state tax on the distributive share of income, the only amount due would be related to local taxes, if applicable.)

County Tax:

Are county taxes included in PTET?
No, county taxes were considered but the additional complexity risked timely passage.

There is a place for county taxes on the composite return? What do I do?
County taxes rarely apply to non-residents.

Please address how county taxes are affected with the PTE credit.
It does not.

Do nonresidents still have County tax due?
County taxes rarely apply to nonresidents.

Does this mean the composite state/county tax paid on behalf of nonresidents is NOT PTET and therefore not a federal deduction?
The portion that otherwise would be composite state tax can be PTET if a proper election is made. If you have county tax, that is composite tax and not PTET.

Can the PTET credit be applied against the county tax obligation at the individual level?
Yes.

Tax Rate:

What tax rate is used, corporate or individual?
Individual.

What is the tax rate?
3.23% for tax years ending in 2022, 3.15% for tax years ending in 2023.

What number from the Indiana return is used for the tax calculation?
This should use the federal distributive share of income with Indiana-specific modifications.

Payments and Safe Harbor:

What about year-end after June 30, 2023 S Corps. Do they need to make estimated payments? Updated 9/26/23
For S corporations with taxable years ending after June 30, 2023, you may need to make estimated payments. In addition, if you are filing an extension, you may also need to make safe-harbor payments. The following is an explanation of how those deadlines interact. For purposes of the example, assume a year end of December 31, 2023. Fiscal year filers will need to adjust the dates accordingly.

1. By December 31, 2023, remit an estimated payment of 50% of the 2023 PTET. Prior-year tax is not used to determine a safe harbor. By April 15, 2024, either:
• Remit any remaining PTET and composite withholding tax due, if you are not filing an extension, or
• Remit the lesser of 80% of your current-year liability or 100% of your prior-year liability. The estimated payment will count toward this amount.
2. By October 15, 2024, remit any remaining PTET and composite withholding plus interest.

If a resident and a nonresident owner with NO election for PTET, does composite get calculated and paid same as in the past?
Basically, yes. However, if you have PTET paid on your behalf (e.g., a tiered structure), you may be permitted to pass through the PTET.

In regards to your discussion regarding composite payments, if you are electing PTET there would not be any composite payments due, correct?
There can be composite payments due in unusual circumstances. For instance, if you elect PTET and have a corporate partner, the difference in rates (4.9% vs. 3.15% or 3.23%) is subject to composite tax.

If we extend a S Corp that wants to make the election, can they make the state extension payment by 3/15/23? How do they do that? Is it through INTIME?
Payment of PTET at extension is not required.

Does 8/30/24 PTET payment due date effectively give taxpayers deferral until then to pay 2022 PTE tax?
Yes.

Will there be estimates due for 2023?
There will be estimates for 2023. They must equal at least 50% of the tax.

Will 2023 have double deduction? Payment for 2022 and 2023?
Yes, the double deduction in 2023 is the benefit we see. You are correct you could have double deduction in 2023.

Is there any safe harbor on the 2023 PTET?
Safe harbor for 2023 is PTE has to be 50% of tax due and paid by year-end.

Is there a safe harbor for PTET estimated payments? Can you rely on 2022 PTET when making 2023 est. payments?
For 2023, there is no prior-year safe harbor. For 2024, 100% of the prior year’s PTET is the safe harbor.

You are saying composite tax still due 4/15, even if PTE is elected and PTET tax is paid later?
Yes.

How can PTET payments be made? Can they be submitted through INTIME?
Since PTET is just a portion of the tax returns, the regular payment channels will all be available including INTIME.

Options, Assessing Clients and Processes:

Is the PTE tax added back to Indiana income?
For all entities other than estates and trusts, yes. However, starting in 2023, estates and trusts will be required to add back PTET. NOTE: If an estate or trust is passing through PTET, the beneficiary may be required to add back PTET.

If I have a partnership that wants to make the election now, how do they do it?
Elections cannot be made for 2022 until after March 31, 2023, because that is when DOR said they can be ready to accept. We understand that DOR plans to use the composite schedule with code 15 to include residents on return.

Please address how pass thru credits will be applied. Edge credits, R&D, etc. Do they apply at entity level? If unused at entity level, will they carry over to individual?
These credits are not applied against the PTET; they are used at the owner level. They can be applied against composite tax; however, the credits cannot exceed the composite tax.

By making estimated tax payments for the current year, does that mean you've already made the election for that year?
No.

Would the PTET apply to guaranteed payments in an LLC/partnership?
Yes.

Timely filing by 4/15? SCorp and Partnerships are due by 3/15 so either way we are extending the business return.
The Indiana returns are not due until 4/15.

When explaining the filing delays to PTE owner/partners, is the general summary that by waiting until this is in place and paying their state tax for 2022 through the entity return instead of on their personal return, we are getting them federal tax savings for their 2023 taxes. Is that correct? We're doing something different this year, but the benefit will be for next year's taxes?
That is how I have explained it to clients.

You mentioned something about insurance companies, does this extend to insurance sellers not the actual insurance company?
Just actual insurance cost is subject to premium tax.

Is this going to sunset when the $10,000 State Tax Limit expires in 2025?
There is no set expiration date in the statute.

Does the state tax apply to ordinary income, guaranteed income, capital gains, other income on the K-1?
Yes.

Does PTET also apply to single member LLCs that files a Schedule C or Schedule E?
No. PTET does not apply to federally disregarded entities.

Is there any way to utilize the PTET election for 2022, if it is a final return for the entity?
Yes.

If you extend and file without an election, you have missed the chance to amend and elect since you filed after original due date?
Yes.

Trusts & Tiered Entities:

Since trusts can't elect is it impossible to pass out to beneficiaries tax paid by partnership trust owns?
It is possible; however, the trust must specifically designate the amount flowing through as PTET.

So, it applies to K-1s to individual taxpayers from Trust Entities? What about Part-Time IN Residents?
Yes.

Pass through entity definition includes trusts — will this be allowed on trust returns?
A direct election is not allowed. However, trusts can pass through PTET from another entity (e.g., a partnership or S corporation).

If I have several levels in my tiers—and the lowest level doesn't make it—can I make the election at the upper tier? It sounds like we can - we just want to confirm!
Yes, you can.

Nonresidents:

With the Q&A can there be clarification about how PTET and composite tax mix with resident and nonresident owners. Will the entity have both PTET for all owners and then also county tax only still for the nonresident owners who are subject to that?
Basically, yes.

It sounds like she is saying that non-residents are eligible for PTET??

Yes.

If I have a non-resident, who we have withheld on Indiana operating income, but NOT on general investment income, now it seems that I have to withhold/pay PTE on ALL income for that non-resident. Making their tax higher, and now they have to file an Indiana return to get refund back from investment related piece?
Extra withholding was taken to cover the individual tax that would have been due when the 1040 is filed for Indiana income tax.

If I have an S corp with nonresident and resident shareholders, is the only deductible portion of tax paid for the resident (not the composite tax)?
Both are deductible.

Specific Scenario Questions:

Can a partnership with 990 and individual partners elect for individual but not 990?
No.

On a closely held entity with all IN owners, is the calculation federal income times 3.23%? Seems like you would make the election on all these types of entities regardless.
Correct, so saving Federal tax of 30% on that 3.23%. If you will get a better benefit than the cost of compliance then it is worth it.

Is there any way to utilize the PTET election for 2022, if it is a final return for the entity?
Yes.

If you extend and file without an election, you have missed the chance to amend and elect since you filed after original due date?
Yes.