For owners of long-term care businesses structured as S corporations or partnerships, the pass-through entity tax may provide opportunities for tax savings, according to one expert.
But “each jurisdiction has different requirements under their PET regimes, and not every pass-through entity owner will have the same benefits,” Jeff Fitzgerald, principal at CliftonLarsonAllen, told the McKnight’s Business Daily.
Under the Financial Accounting Standards Board’s Accounting Standards Codiﬁcation 740, certain companies are eligible for the pass-through entity tax, which allows tax deferments and other benefits.
Most skilled care facilities are for-profit businesses that are owned or operated by individuals or pass-through entities such as limited liability companies and partnerships, the American Health Care Association said in a white paper it presented to government officials in 2018.
The implications under ASC 740 vary by jurisdiction.
“Many state jurisdictions are now allowing or requiring pass-through entities to calculate and pay tax at the entity level,” Fitzgerald wrote in an article last week. “Management of pass-through entities must use judgment determining whether a particular tax is within the scope of ASC 740, as there are taxing jurisdictions that compute tax due on a wide variety of bases that could be less than a comprehensive measure of income, but still fall within the scope of ASC 740.”
Fitzgerald told McKnight’s that operators should “work with an adviser to perform an analysis of the PET provisions in each state where you operate.”
Electing to be a pass-through entity isn’t necessarily a permanent decision, according to the expert.
“Certain jurisdictions permit entities to elect to be subject to a PET for certain period(s) — typically a single annual period. The PET election is generally effectuated with or by the timely filing of the entity’s tax return, and typically does not require approval or review of the relevant taxing authority,” Fitzgerald wrote. “In these instances, a question arises as to the proper timing or tax year to account for the PET within the financial statements.”
Being a pass-through entity can get tricky, as there are several variables, according to Fitzgerald:
- PET regimes that are only in effect when an entity is in a taxable income position
- Accounting for estimated tax payments made by an entity prior to the effective date of accounting for the PET as an income tax of the entity
- Jurisdictions that compute PET amountsbased on the income attributable only to owners who have elected to be subject to the PET
- Realizability of any deferred tax assets, if applicable
- Certain PET regimes that permit loss or credit carryforwards that may only be realized by an entity’s current or future taxable income under the PET regime
- Election and revocation requirements as enacted by each taxing authority.