What You Should Know About Iowa’s New Pass-Through Entity Tax (PTET)

A new law passed in Iowa in 2023 applies to business owners with a partnership or S corporation. It’s referred to as the “Pass-Through Entity Tax” or PTET. Partnerships and S-corporations are known as “pass-through” entities for tax purposes because the business income passes through to the personal tax return of the owner. 

Owners of these types of business entities can now elect to pay the Iowa tax through the business instead of at the personal level. The deadline to make the election for 2023 is the due date for filing the IA 1065 or IA 1120S income tax return, including extensions.

For some business owners, it may be beneficial to pay the Iowa state tax at the entity level as the tax paid can be used as a deduction to offset federal tax. Prior to PTET, any state tax paid due to business income was subject to State and Local Tax (SALT) limitation of $10,000. 

State income and property taxes typically exceed $10,000 for many individuals, so some of the state tax may not be deductible federally. With PTET, you can potentially avoid the $10,000 limitation for state taxes paid from the business.

If you have any questions, please contact your planning team at Syverson Strege.

Disclaimer: Syverson Strege does not provide tax advice. It’s important that you consult a tax professional to see if PTET makes sense based on your situation.