Proposed Legislation to Change Indiana Pass-Thru Entity Tax 

As of this writing (February 2, 2023) the Indiana legislature is currently considering Senate Bill 2 (SB2), which would enable pass-thru entity owners to effectively receive a tax deduction for Indiana state tax paid on the earnings of the entity.  If passed in its present form, this will be effective for 2022 returns.  

Why is this happening? When Congress passed sweeping law changes in 2017, it effectively eliminated itemized deductions for 90% of taxpayers.  Even those who can itemize can only deduct $10,000 of state taxes.  Since the law passed, many attempts have been made by many states to rectify this.  The method that stuck and is legally sound is to allow pass-thru entities the option of paying income tax at the entity level.  

Currently, individual owners pay the income tax on their share of pass-thru income. Indiana tax paid in this manner is usually not deductible for the reasons stated above.  The proposed change would allow entities to elect to take the deduction on the entity return.  This would allow the owners to deduct the tax as part of the normal reporting of their entity income on the owner’s tax return, eliminating the need to take an itemized deduction to get the federal tax benefit.  The owners would also get a credit on their state income tax return for the tax paid by the entity. Currently there are 29 states that allow this, and Indiana wants to be number 30.  It’s a good solution that would potentially benefit a lot of taxpayers. 

Why should I care now? This bill is widely supported in the legislature, and a version of it will likely pass.  It is being fast-tracked with the goal to have it on Governor Holcomb’s desk by mid-February.  If the governor signs the bill in its current form, partnerships and S corporations will have the option to apply this to their 2022 tax returns.   

Some pass-thru entities will benefit from this bill, and others will find that it may not save them enough taxes to make the election worth it for 2022 returns.  Taxpayers who wish to keep their options open will need to extend their 2022 returns, which are generally due on March 15, 2023, to be able to review the final legislation.  

Please contact your DWD CPA for more information.