If you own an S-corp or partnership in Kentucky, you may have heard your accountant mention the "PTE election" and wondered if it applies to you. Here's what it is, in plain English.
Kentucky's pass-through entity (PTE) tax, created by House Bill 5 in 2023, lets partnerships, S-corporations, and LLCs taxed as pass-throughs pay Kentucky income tax at the entity level instead of leaving it entirely to the owners' personal returns. The entity elects to pay tax on its Kentucky-source income directly, at a flat 4.5% rate, and the owners then receive a credit on their own Kentucky returns for the tax the entity already paid on their behalf.
Why would you want your business to pay tax it doesn't have to? The short answer is the federal SALT cap. Since 2018, individuals have only been able to deduct up to $10,000 of state and local taxes on their federal return. But when a business entity pays state tax directly, that tax is deducted as a business expense on the entity's federal return, with no $10,000 ceiling involved. For owners in higher tax brackets with significant pass-through income, that difference adds up.
The election isn't automatic. An authorized person has to make it, either by filing Form 740-PTET-ELECT separately or by checking the election box directly on Form 740-PTET. The election needs to be made by the 15th day of the fourth month after the close of the tax year, or by the extended due date if the entity is on extension. For most calendar-year businesses, that's April 15. Entities that elect in are also expected to make quarterly estimated payments using Form PTET-ES for tax years beginning in 2024 and later.
This isn't a decision to make without running the numbers. The PTE election makes the most sense for profitable pass-throughs with owners who itemize deductions and are already bumping up against the SALT cap. If your business has multiple owners with very different tax situations, or if most of your income isn't Kentucky-source, the math can get more complicated.
We help clients across Lexington and Louisville figure out whether the PTE election actually saves them money before they file it, not after. If you own an S-corp, partnership, or multi-member LLC and haven't had this conversation with your preparer yet, it's worth having before your next filing deadline.
Book a consultation to find out if the PTE election makes sense for your business.
