¶ Understanding PTET
Welcome to the profitable painter podcast . The mission of this podcast is simple To help you navigate the financial and tax aspects of starting , running and scaling a professional painting business , from the brushes and ladders to the spreadsheets and balance sheets . We've got you covered . But before we dive in , a quick word of caution .
While we strive to provide accurate and up-to-date financial and tax information , nothing you hear on this podcast should be considered as financial advice specifically for you or your business . We're here to share general knowledge and experiences , not to replace the tailored advice you get from a professional financial advisor or tax consultant .
We strongly recommend you seeking individualized advice before making any significant financial decision .
This is Daniel , the founder of Bookkeeping for Painters .
And this is Richard , text director , with Bookkeeping for Painters . How's it going , daniel ?
It's going well , beautiful day over here . I imagine it is .
I'm doing good . I'm doing good . We don't quite have the tropical weather here , but I got to say it's been warm and it's been dry . The farmers always want rain around where I'm at , but this year I think they've got some legitimate complaints , Although I will say I haven't seen too many crops looking sad at this point . So I think it's going to be okay .
But this is not a farming podcast , is it ?
I was about to pull out my almanac , my farmer's almanac , and kind of cross-reference what you were saying . But today we're talking about the PTET , which everyone that's listening is probably at . What the heck are you talking about ? And it's kind of a newer thing that's come along in the last couple of years and it could be a good tax-saving strategy .
But you got to kind of pay attention to the details on this one .
Yeah . So PTET is one of the myriad of acronyms that we accountants like to use . It stands for pass-through entity , or you might hear as PTET , which is pass-through entity tax , and it is a voluntary tax that you can pay at the entity level . That covers the tax that you would normally pay at the individual level .
So I know it's a little bit of a mouthful , but maybe we could talk about the history of PTET and why it came about . For the longest time , we were able to deduct our state income tax payments on our 1040s .
So if you have the privilege of living in a high tax state , like I do in Illinois or , even worse , california , new York if you live in one , you know you would deduct your state income taxes on your Schedule A when you itemized . And that went on for a long , long time until we came to 2017 and we got the Tax Cuts and Jobs Act .
Two things of that act changed how people deducted their taxes . One is the standard deduction was doubled , so now fewer people are actually itemizing and more people are taking the standard deduction . And two , there was a limit placed on state and local taxes , so a lot of times this is called the Salt Cap state and local tax . Again , we love the acronyms .
So , regardless of how much income tax you actually pay to your state and how much property tax you pay to your state , the most you can deduct on your taxes is $10,000 . So you could be paying $50,000 , $60,000 in income tax , have $20,000 a year in property tax and your deduction is $10,000 . That's if you're married .
If you're single , it's half that , at $5,000 .
Yeah , so it sounds like the Tax Cuts and Jobs Act generally was good for lower taxes generally . But on this specific area , if you lived in a high tax state like California , new York , those types of states this is not good .
If you're in one of those high tax states , your Schedule A itemized deduction for state taxes is capped at $10,000 and that is not good . So you're probably , if you are a higher income person , you're probably not in a good situation with this limitation . Here sounds like .
Right . Right , if you live in Texas , washington , new Hampshire , tennessee , a state that has no income tax , then this doesn't really apply to you . But yeah , if you live in a high income tax or even a moderate income tax state , then this is something to look into .
So as a response to this , a lot of states started coming up with what they call the pass through entity tax , and that is where you can . If you are a shareholder in an escort or a partner in a partnership or you have some kind of involvement in a business entity that is taxed separately . So if you're a sole proprietor or an LLC , that's disregarded .
This does not apply . But if you belong to some kind of entity , you can elect to have that entity pay your state income taxes for you . Essentially and the reason that is a workaround is there is no cap on when entity can deduct for state taxes .
So if the entity pays it for you , that entity can take the full deduction , which is then pass through to its shareholders or partners . Plus , you can still take the standard deduction on your form .
So there's a little bit of double dipping there , even where maybe you don't have enough taxes to justify itemizing If the standard deduction is $27,700 for a married couple . Maybe you'll never hit that . Let the entity pay it for you . You can still take the $27,700 . Or maybe you've got a ton of taxes which are running up against this $10,000 salt limitation .
Let the entity pay it for you , get the full deduction and save quite a bit .
Yeah , and this is a newer thing because the state legislatures started probably getting some feedback like , hey , we can't deduct , you're charging us all these taxes , we can't deduct it on our federal tax return . And so these state legislatures started putting this new pass through entity tax to .
Basically , it's making things more complicated , for sure , but it is supposed to be helpful to the taxpayer , so it does . Although this is a little bit detailed and a little bit complicated , it will pay off to pay attention to this , especially if you're making some decent money in your painting business I would say $50,000 or more per year .
Definitely start to pay attention to this and then also , if you're in one of these , pass through entity states .
Yeah , yeah . So right now there are 34 states that have a pass through entity tax . I won't I won't spend the time naming them all , but your higher income California , new York , illinois , wisconsin , they're definitely in there .
There's four more states that do have income taxes at our considering Pass through entity tax in the next year or so , I think Maine , pennsylvania , rhode Island , hawaii , and then there are states that have no income tax and if you're fortunate enough to live in one of those states , then this doesn't really apply because you don't .
You don't have to pay state taxes to begin with . But yeah , if you're trying to kind of like narrow it down , like hey , should I pay attention to this or not ? Step one do you live in a state with an income tax ? If the answer is yes , is it one of the 34 states that have a PTE T ? Check that out .
If the answer is yes , do you have a stake in some kind of business entity like a corporation , escort or partnership ? And the answer to that is yes , then are you making enough money where tax planning makes sense to you ? So , daniel , you mentioned $50,000 . I think that's that's definitely a good point .
Anything above that , it's probably worth your time to look into . So if you decide that you want to pursue something like this , this is where it gets really kind of tricky , with the devil being in the details . Every state is different .
Every states PTE T is different , how they handle it is different , the requirements to participate are different , so there is is not going to be a one size fits all .
Plus your first . Your individual tax bracket is different , so all these things are different . So it's definitely hard to nail down and give some general advice . But yeah , I think maybe one , like you said make sure you're actually in an entity , make sure you're in a pastor entity state , and then then three , you're actually making some money .
But maybe we could go through some sort of case study that kind of demonstrates the the value of of paying attention to this .
Yeah , so you know we just got done doing tax planning for clients of ours who I think would be a great case study . This gentleman lives in California , he has a successful painting business and during our tax planning we projected that he was going to have about $270,000 in profit for his escort this year .
Now he is the only shareholder , so that kind of keeps things a little bit simpler . We talked about PTE and how it would save him money . So the $270,000 , the California PTE rate is 9.6% . So in his case his escort would pay the 9.6% on the $270,000 . The total on that is just under 26,000 .
Now that's not an additional tax because the $26,000 PTE is going to be a credit on his personal return . So what he would have paid 26,000 on his California individual income tax return he's now going to get a credit for that because the corporation is paying it on his behalf . So that's a wash .
But where the savings do come in is that this $26,000 in taxes now becomes deductible on the federal level because it is being paid by the corporation and the corporation is able to take the full deduction . If he paid it individually he'd run up against that $10,000 salt cap , but because the corporation is going to handle it . There is no limitation .
So he is in a 24% tax bracket and he is going to get a $26,000 tax deduction . We multiply the tax deduction by his tax bracket and his tax savings are about $6,220 . So that is very significant . That is over $6,000 less tax he has to pay simply because he opted in for PTE and he had his corporation pay the tax instead of paying it individually .
Yeah , so that's huge . I mean , the additional amount of time to do this would pretty much be a wash because you're going to have to pay your taxes anyways is just when you pay them and to who you're paying them basically is kind of the timing and the entity that you're paying . So it's really no extra time you need to spend .
It's really just what the knowledge of knowing about the pass-through entity , that this is a thing and then it applies to you is all you really need to do to implement this strategy . So there's very rarely a strategy where it's really just there's no extra things you really need to do or time you need to spend .
It's really just knowing a certain thing and implementing it . So this is really awesome .
Yeah , I agree . Those tax saving strategies require you to buy something to write them off . I have to purchase equipment or I have to provide some kind of benefit to get a tax break . In this situation , you're going to be paying the taxes no matter what , so this is just doing it in a way that is most advantageous to you .
Now , that being said , there are some caveats here . Every state is different and there is definitely nuance in here . California has some of the strictest rules for opting in because remember , this is not by default . This is something we have to choose to do and proactively elect to do before the deadline or we don't get to participate .
For example , if you don't opt in by June 15th , you don't get to participate this year , in 2023, . We have a little bit of a reprieve because California was hit by such severe winter storms that most of the state I think all but three counties in the state have had their tax deadlines extended to October 16th because of the natural disasters .
So in this case , if you live in California and you don't live in one of those three counties , you get bonus time to do this . You get until October 16th . Normally , the deadline would have been closed by now . Every state is different . Some states are very strict , other states are a little bit looser .
The important thing is figuring out what your state's regulations are and how you have to opt in . California requires a payment . It depends on whether it's your first time . If it's your first time doing PTE , the payment is $1,000 or more to opt in . If it's not your first time doing PTE , then the payment is 50% of last year's PTE .
Again , a lot of nuance , a lot of details . You talk to your tax professional , who is familiar with the rules in your state , and have them help . You make sure that you are getting in under the regulations so that you don't miss out .
¶ PTE Questions and Future Ideas
Awesome , All right , Well , I think we'll wrap up the podcast . If you have any general questions about the PTE , feel free to go to Facebook and type and grow your painting business , search that join the group and you can post your questions there . Or if you have any input on future ideas for podcasts , we'd love to hear from you .
Yeah , absolutely . If you're curious , if your state has a PTE , feel free to ask us in the Facebook group . We'd love to talk more and answer some questions . Until then , thank you for listening . We hope to see you on the next podcast .