December 2022 – Update on the Colorado PTE Election
Update on the Colorado PTE Election
Summary: An Update
Earlier this year, we reached out to you with a newsletter on the Colorado SALT Cap Workaround (also referred to as the Passthrough Entity Election or “PTE Election”). Now that we are further into the year, we wanted to provide an update on the mechanics of this election as more information has become available.
In 2018, the Tax Cuts & Jobs Act (TCJA) placed a $10,000 limit on Schedule A (Itemized Deductions) for the state & local tax (SALT) deduction for individual tax returns. The SALT deduction limit has since impacted high-income taxpayers who itemize their deductions.
In 2021, the SALT Parity Act was initiated in Colorado to provide relief on this $10,000 limit. Effective starting January of 2022, the SALT Parity Act allows business entities to make an annual “check the box” election known as the Colorado PTE Election. This election allows businesses to pay and deduct state income taxes on behalf of the owners of the entity, at the entity level, bypassing the SALT limitation at the individual level.
– The 2022 SALT Parity Act Election Form DR 1705 is now available. Partnerships and S-Corporations may now use this form to elect to pay Colorado income state tax at the entity level for 2022 if they wish to make the election before their tax return is filed.
- Please note: once made for 2022, this election is irrevocable for 2022.
- Please also note: the PTE election can also be made on the 2022 DR Form 0106 in the normal course of filing your 2022 tax return.
– In future years, the Colorado Department of Revenue plans to include an option for the PTE election on the estimated tax payment Form DR 0106EP.
– Electing entities can pay quarterly estimated taxes online or through mail using the Form DR 0106EP.
- Quarterly payments will follow the same schedule as C-Corporations: April 15th, June 15th, September 15th, and December 15th.
- Quarterly payments are required if the electing entity’s net Colorado tax liability for the year will exceed $5,000. In cases where tax liability is difficult to predict, we recommend making the quarterly payments to be safe.
- Each quarterly payment must be 25% of the required annual amount. For 2022, the required annual amount due is 70% of the actual net Colorado tax liability for the current tax year, 2021.
- In future years, the required annual amount will be calculated by multiplying the Colorado income tax rate by the entity’s total net income in the previous year.
Keep In Mind:
In May of 2022, the legislation for the PTE Election was amended to allow partnerships and S-Corporations to retroactively elect to pay Colorado income taxes on behalf of the owners at the entity level. This retroactive provision is effective on or after January 1, 2018.
While these retroactive provisions exist, there are still several unknowns that the Internal Revenue Service and Colorado Department of Revenue will need to address for this process. Additionally, the opportunity to apply this election retroactively will not be available until September 1st, 2023. Taxpayers will then have until July 1, 2024 to apply for this election retroactively.
In summary, the guidance for retroactive treatment of the PTE Election has not yet been finalized. We anticipate more information to come, and will reach out to you with additional information as it becomes available.
The PTE Election allows partnerships and S-Corporations to pay and deduct state income taxes on behalf of the owners of the entity, thus also deduct these taxes, bypassing the SALT limitation at the individual level. The PTE Election can be made on Form DR 1705 before year-end of 2022, and can also be made in the normal course of filing in the coming year.
While this election can and will be beneficial to many pass-through entity owners, the costs and benefits should be considered in determining if the election is favorable for each entity owner. If you wish to evaluate your status and determine if the PTE Election would be beneficial for you and your business, please reach out to us. We will be happy to assist you with your individual eligibility and provide guidance regarding the most advantageous approach for you.
For additional information in the meantime, please review the Colorado Supplemental Instructions for Partnerships and S Corporations Making an Election under the SALT Parity Act handout.
EMPLOYEE SPOTLIGHT: TERRA MADDEN
Terra joined Soukup, Bush & Associates in 2021. She has her B.A. in Biology and a minor in Chemistry from the Oklahoma Panhandle State University in 2015. She currently assists with all aspects of administrative management as well as processing both individual and corporate income tax returns.
In her free time, Terra enjoys being with her dog, Belle, spending time with her family and friends, and being in the Colorado sunshine.