Things Have Changed, Pass Through Entity Tax

By now you may have heard that many states have enacted state pass-through entity-level taxes (PTET). We discussed this in a previous blog State Pass Through Entity Election – Is it right for your business?

We would now like to explore the accounting treatment for this matter.

Accounting Considerations

FASB ASC Topic 740 provides guidance related to income taxes. Basically, income taxes attributable to pass-through entities are accounted for in accordance with ASC Topic 740 (taxes) and income taxes that are attributable to the owners of a pass-through entity are accounted for as a transaction with owners (distributions).

Entities need to consider several factors to determine whether a particular PTET is attributable to the entity (i.e., within the scope of ASC 740).

Some factors to consider related to reporting as tax or equity transaction are as follows:

Indicates Entity Attribution

• Owner is not required to file a tax return and/or permitted to claim payment of tax by entity against owner’s taxes
• Income of entity for which tax was paid by entity is excluded from owner’s income tax return
• Tax liability is not joint and severally liable by owners of the pass-through entity
• Laws and regulations indicate that the tax payment made is not on behalf of its owners.
• The tax base is determined without regard to the attributes of the pass-through entity owners

Indicates Owner Attribution

• Owner permitted to file tax return and claim payment of tax by entity as payment against owner’s income taxes
• Laws and regulations indicate that the tax payment made is on behalf of its owners
• Tax base is determined by the attributes of the pass-through entity owners

These are not the only factors to ponder, but they give you an idea of items to consider related to accounting for these matters. In certain states income tax assessments can be related to either the entity or its owner. In this case, accounting can be determined by a policy election selecting either reporting method. As Bob Dylan’s song, Things Have Changed goes, “Lotta water under the bridge, lotta other stuff too. Don’t get up gentlemen, I’m only passing through”. Some things have changed, and some are the same. These considerations can be complex, but you don’t have to walk this path alone, we are here to help.