On February 22, 2023, Governor Holcomb signed Senate Bill 2 into law which impacts many partnerships and S Corporations, also known as pass-through entities. The new law allows certain pass-through entities to elect to pay Indiana state income tax on the entity’s Indiana income on behalf of its owners. The pass-through entity tax will be a federal business deduction in the year paid. It will be a tax credit on the owners’ Indiana individual income tax return. Essentially, this is a workaround of the $10,000 federal limitation on state and local taxes paid.

IMPACT ON 2022 TAX RETURNS – EXTENSIONS
Since the law is retroactive to 1/1/2022, business owners must now decide if they will elect to pay the pass-through entity tax with their 2022 Indiana business tax return, due 3/15/2023. Due to the timing of this new law, if the election is going to be made, an extension of the federal business tax return is required. The Indiana Department of Revenue will now work to provide guidance on how this election will be made and reported, and tax filing software will need to be updated to implement the changes. This will more than likely cause a delay in filing individual owners’ tax returns, possibly requiring those returns to be extended as well.

TAX SAVINGS – 2023
For 2022, an electing pass-through entity will pay a 3.23% tax on Indiana business taxable income. The tax paid will be a federal business deduction in 2023. Your federal tax savings will ultimately depend on your 2023 individual income tax bracket.