Pass-Through Entity Tax (PTET)

On May 11, 2023, Governor Reynolds signed House File 352 which creates a voluntary election for a partnership or S corporation to be subject to Iowa income tax at the entity level. This is referred to as the Pass-Through Entity Tax (PTET). When the pass-through entity elects and pays the PTET, its owners receive a percentage of the PTET as a refundable tax credit. The legislation applies retroactively to tax years beginning on or after January 1, 2022.

This webpage is intended to provide guidance and answers to frequently asked questions related to the PTET. This page may be updated as the Department adds or refines guidance on the PTET. If you have a question that is not yet answered below, please check back to this page at a later date. You may also submit questions or comments about the PTET through the Request for Tax Guidance (select “HF 352” as the tax type).

References in this guidance to “tax year 2022” generally refer to tax years that begin during the 2022 calendar year, and references to “tax years 2023 and later” generally refer to any tax year beginning on or after January 1, 2023.

 

Helpful Links

2022 PTET Form available now on GovConnectIowa

Making a PTET Election

  • A business entity that is taxed as a partnership or S corporation for federal and Iowa income tax purposes and that is required to file a federal and Iowa partnership income tax return (federal form 1065 and IA 1065) or a federal and Iowa S corporation income tax return (federal form 1120-S and IA 1120S). This may include an S corporation, general partnership, Limited Liability Company (LLC),  Limited Liability Partnership (LLP), or Limited Partnership (LP).

    A publicly traded partnership as defined in Internal Revenue Code section 7704 is not eligible to make the PTET election. A single-member LLC or other entity treated as a disregarded entity for federal and Iowa tax purposes is not eligible to make its own PTET election.

  • No, the election is voluntary. However, the election is binding on the pass-through entity and all its owners once made for the applicable tax year.

  • The PTET election must be made by an authorized person from the pass-through entity. This is any individual with the authority to sign the pass-through entity’s Iowa partnership income tax return (IA 1065) or Iowa S corporation income tax return (IA 1120S) and bind the electing pass-through entity and its owners for Iowa income tax purposes.

  • A PTET election only applies for one tax year. A separate election must be made for each tax year. A PTET election may be made for any tax year beginning on or after January 1, 2022, but before January 1, 2026 (i.e. tax years 2022-2025). The PTET election is scheduled to expire in the same tax year that the individual limitation on the state and local tax (SALT) deduction under Internal Revenue Code section 164(b)(6) expires. If that SALT deduction limitation is extended by Congress in the future, the Iowa PTET election will automatically be extended for the same period of time.

  • (updated on 12/14/2023)

    The procedure for making a PTET election will be different for tax year 2022 and for tax years 2023 and later.  

    Tax Year 2022

    The Department had developed a 2022 PTET form that is filed online through GovConnectIowa. Pass-through entities use this 2022 PTET form to make the PTET election, compute and report the PTET due, and compute and report the PTET credit available to each owner. This is the only method to make a PTET election for tax year 2022. The Department will not be modifying any existing 2022 income forms or schedules.

    It is strongly recommended that a pass-through entity logs into the GovConnectIowa account to complete their 2022 PTET form. However, there is an option to Quick File the 2022 PTET form without logging in.  

    The 2022 PTET form on GovConnectIowa is a supplement to the pass-through entity’s 2022 IA 1065 partnership return or 2022 IA 1120S S corporation return. The entity must file its 2022 IA 1065 or 2022 IA 1120S on or before the date it files its 2022 PTET form. In order to complete the 2022 PTET form on GovConnectIowa, the pass-through entity will need income information and other data reported on its filed 2022 IA 1065 or 2022 IA 1120S. If the electing pass-through entity is required to amend its 2022 IA 1065 or 2022 IA 1120S at a later date, the entity will also be required to amend its 2022 PTET form on GovConnectIowa.  

    Pass-through entities required to file a tax year 2023 short-year return before the 2023 Iowa tax forms become available are also eligible to make a 2023 PTET election using the 2022 PTET form on GovConnectIowa.

    Tax Years 2023 and Later

    Pass-through entities will be allowed to make a PTET election for a tax year in one of two ways: 

    1. Make the election directly on the pass-through entity’s IA 1065 partnership return or IA 1120S S corporation return.
    2. Submit a PTET election form prior to filing the Iowa return by logging into the pass-through entity’s partnership or S corporation account on GovConnectIowa.
      • From the accounts panel for your partnership or S Corporation account, select “Make a PTET Election (tax year 2023 or later)” hyperlink 
      • This PTET election form will only record the entity’s PTET election; the electing entity’s PTET liability will be computed on the IA 1065 or IA 1120S.
      • Pass-through entities are encouraged to create a GovConnectIowa logon and gain access to their tax accounts. For more information on gaining access to your accounts, visit our GovConnectIowa Help page.
  • No. The election is irrevocable and binding on the pass-through entity and all of its owners for the applicable tax year.

  • (updated on 12/4/2023)

    For tax year 2022, the PTET election must be made by the later of the following dates:

    • April 30, 2024, or
    • The due date for filing the 2022 IA 1065 or 2022 IA 1120S, including extensions.  

    For tax years 2023 and later, the PTET election must be made by the due date for filing the pass-through entity’s IA 1065 or IA 1120S income tax return, including extensions.

  •  

    Calculating and Paying the PTET

     

  • (updated on 9/18/2023)

    The PTET calculation will be made at the entity level according to the electing entity’s Iowa-source distributive items and without regard to the residency or entity type of any particular owner. The PTET calculation for tax year 2022 is as follows:

    The PTET calculation for tax year 2023 will be made on the IA 1065 or IA 1120S return, and the tax rate will be 6%.

  • No, a net operating loss deduction is not allowed in the calculation of the PTET. However, a PTET election will not prohibit qualifying owners from claiming their own net operating loss on their Iowa tax return.

  • No, a qualified business income (QBI) deduction is not allowed in the calculation of the PTET. However, a PTET election will not prohibit qualifying owners from claiming their own QBI deduction on their Iowa tax return.

  • An electing pass-through entity may claim only the following tax credits against the PTET:

    • A nonrefundable franchise tax credit if the entity is a financial institution that also paid Iowa franchise tax for the same tax year.
    • The entity must file and pay its franchise tax liability prior to claiming this franchise tax credit against its PTET.
    • This franchise tax credit claim by the electing pass-through entity will not prohibit a qualifying owner from claiming their own franchise tax credit using the IA 147 Franchise Tax Credit form.
    • A refundable PTET credit the entity receives as a member of another pass-through entity that made a PTET election, to the extent it was not claimed on another qualifying return.
    • A refundable composite credit the entity receives as a nonresident member of another pass-through entity, to the extent it was not already claimed on another qualifying return.

    All other tax credits earned or received by the electing pass-through entity must be allocated to owners on the IA Schedule K-1 and claimed by those eligible taxpayers.

  • If the PTET payment meets the definition of a “Specified Income Tax Payment” in section 3.02(1) of I.R.S. Notice 2020-75, it may be deductible (without regard to the $10,000 SALT deduction limit) on the electing pass-through entity’s federal income tax return and will reduce the amount of nonseparately stated income reported on the owners’ federal Schedules K-1. Both cash-basis and accrual-basis taxpayers generally take deductions for state tax payments in the tax year during which the tax is paid. However, special rules apply to accrual-basis taxpayers who elect a recurring item exception. Also, the date the entity makes its PTET election may affect the timing of its Specified Income Tax Payment deduction. For more information, see Internal Revenue Code section 461 and its related Treasury Regulations. Taxpayers should consult with a tax professional about the availability and timing of the deduction for PTET payments.    

    Whether or not that PTET payment will also qualify as a deduction on the electing pass-through entity’s Iowa income tax return (IA 1065 or IA 1120S) depends on the tax year in which the PTET payment is deducted:

    For tax year 2022, Iowa law requires taxpayers to add back any Iowa income tax deducted in computing federal taxable income. See 2022 Iowa Code sections 422.9(2)(a) and 422.35(4)(b). This add-back is required to be made on the 2022 IA 1065, Schedule A, line 8, or on the 2022 IA 1120S, Schedule A, line 8, and flows through to owners as an Iowa modification on the IA Schedules K-1. Taxpayers should be aware that this add-back of the Iowa income tax deduction is required even though the PTET credits reported to owners for tax year 2022 must be reduced by 8.53%. Please see the FAQ below entitled “Can the owners of an electing pass-through entity claim a tax credit for the PTET paid by the electing pass-through entity? How are the owners’ PTET credits calculated?” for additional information about PTET credits.      

    For tax years 2023 and later, Iowa law no longer requires taxpayers to add back Iowa income tax deducted in computing federal taxable income. As a result, Iowa PTET payments will be deductible, and related PTET refunds will be taxable, to the same extent they are deductible or taxable on the electing pass-through entity’s federal income tax return.

  • (updated 12/4/2023)

    For tax years ending prior to May 11, 2023, the electing pass-through entity will not be subject to penalties or interest on the PTET if it makes its election and payment by the election deadline, which is the later of:

    • April 30, 2024 or 
    • The due date for filing the 2022 IA 1065 or 2022 IA 1120S, including extensions.

    For tax years ending on or after May 11, 2023, an electing pass-through entity will not be subject to late payment penalties if the PTET is paid by the original due date of the IA 1065 or IA 1120S, or late filing penalties if the IA 1065 or IA 1120S is filed by the original due date. If the electing pass-through entity pays at least 90% of its PTET by the original due date of its IA 1065 or IA 1120S return, the electing pass-through entity will be eligible for an automatic six-month extension to file its return without incurring a late filing penalty, and no late payment penalties will be imposed. Interest will accrue on any amount of PTET not paid by the original due date of the IA 1065 or IA 1120S.

  • Yes, but only for tax years that begin after May 10, 2023.

    Estimated PTET payments are not required for tax year 2022.  A pass-through entity will not incur any penalty for underpayment of estimated tax on its tax year 2022 PTET election.  

    Estimated PTET payments are required for tax year 2023 only if the electing entity’s 2023 tax year begins between May 11, 2023, and December 31, 2023.  

    Estimated PTET payments are required for any tax year beginning on or after January 1, 2024.  
    Estimated PTET payments are required to be made in the same manner as corporations and financial institutions. Generally, quarterly estimates are required if the entity’s PTET, after allowable credits, will exceed $1,000 for the tax year. Underpayment penalties apply to electing pass-through entities that fail to make timely estimated PTET payments, but certain penalty exceptions may be available. Note that the penalty exception described in Iowa Code section 422.89(1) and Iowa Administrative Code rule 701–505.5(2)”a”(1), for taxpayers who pay estimates according to their prior year’s tax liability, will not be available to a partnership if it did not make a PTET election in its prior tax year, and will not be available to an S corporation if it did not make a PTET election or owe built-in gain/passive investment income tax in its prior tax year.    

    For more information about estimated tax requirements, please consult Iowa Code chapter 422, subchapter VII; Iowa Administrative Code 701–Chapter 505; and the IA 2220 Underpayment of Estimated Tax form. The IA 2220 form will be updated in the future to include pass-through entities making a PTET election.

  • Payment should be made to the entity’s partnership account or S corporation account.  Payment options include payment through Modernized eFile (MeF), GovConnectIowa, or by check. Do not send cash. Submit a voucher if making payment by check. Vouchers are available on GovConnectIowa. Make checks payable to “Iowa Department of Revenue”.

    Visit tax.iowa.gov/govconnectiowa-help for assistance.

  • A refund may be requested by the pass-through entity. To request a refund of amounts paid to your partnership or S corporation account, file an IA 1065 or IA 1120S and report the amount of estimated or other voucher payments on the appropriate line of the return.

  •  

    Interaction with the IA PTE-C Composite Return

     

  • No. A pass-through entity is not required to file an IA PTE-C for any tax year it elects to pay the PTET. However, a pass-through entity that has already filed its 2022 IA PTE-C will not be prohibited from making a PTET election for the same tax year.  

    Any pass-through entity that files an IA PTE-C on behalf of a nonresident member for a tax year that it is not required to do so must abide by the law and administrative rules related to the calculation, reporting, payment, assessment, and collection of Iowa composite return tax, penalties, and interest, with respect to all nonresident members.

  • Generally, no. Iowa Administrative Code rule 701–405.3(5)”c” provides that a pass-through entity may not request a refund of composite return tax paid on behalf of a nonresident member after the composite tax return has been filed for a tax year. Those amounts are treated as paid by the nonresident member and any refund may only be requested by the nonresident member on that nonresident member’s own qualifying Iowa tax return.

    However, any overpayment of composite return tax that the pass-through entity elected to apply to its next tax year’s IA PTE-C Composite Return (see for example the 2022 IA PTE-C, line 10) may be transferred upon request to the pass-through entity’s partnership or S corporation account to satisfy its PTET liability. Transfer requests for these overpayment carryforwards must be made before the end of the tax year to which the overpayment was applied. Transfer requests may only be made by an authorized individual who has a valid IA 2848 Iowa Department of Revenue Power of Attorney (14-101) or Representative Certification form (14-108) on file with the Department for the pass-through entity’s composite tax account.

    Transfer requests may be made over the phone by calling the Department at 515-281-3114 or 800-367-3388.

  • Yes. If an electing pass-through entity has not filed an IA PTE-C Composite Return for a tax year, it may request a transfer of a composite tax payment made for that tax year to the pass-through entity’s partnership or S corporation account to satisfy its PTET liability. Transfer requests may only be made by an authorized individual who has a valid IA 2848 Iowa Department of Revenue Power of Attorney (14-101) or Representative Certification form (14-108) on file with the Department for the pass-through entity’s composite tax account.

    Transfer requests may be made over the phone by calling the Department at 515-281-3114 or 800-367-3388.

  •  

    Information for Owners of an Electing Pass-Through Entity

     

  • Yes, provided the owner has not already filed their return and requested a refund of the payment or credited the payment to tax due or to a later tax period. Transfer requests may only be made by the account owner (in the case of individuals) or by another authorized individual who has a valid IA 2848 Iowa Department of Revenue Power of Attorney (14-101) or Representative Certification form (14-108) on file with the Department for that owner’s account.    

    Transfer requests may be made over the phone by calling the Department at 515-281-3114 or 800-367-3388.

  • (updated 9/18/2023)

    Yes, with two exceptions described below.  

    Each owner will receive a refundable tax credit for a portion of the net PTET paid by the electing pass-through entity. This is referred to as a PTET credit. The total PTET credits available to owners must be reduced by a percentage equal to the PTET rate in effect for that electing tax year. This reduction will be 8.53% for tax year 2022 and 6% for tax year 2023. This reduction will be applied at the entity level before the PTET credits are allocated to the owners. For example, the total PTET credits available to owners for tax year 2022 is calculated as follows:

    The total available PTET credits must be allocated to each owner in the same ratio that the entity’s taxable income was allocated to that owner. Once allocated, the PTET credits may be claimed by each owner, with two exceptions: an insurance company owner or credit union owner exempt from Iowa income tax under Iowa Code section 422.34 is not eligible to claim their PTET credit.    

    Example 1: Partnership makes a PTET election for tax year 2022 and pays $1,000 of net PTET.  The owners’ total available credits must be reduced by $85.30 ($1,000 x 8.53%). Therefore, the partnership will report a total of $914.70 ($1,000 - $85.30) in refundable PTET credits to its owners.  

    Example 2: S corporation makes a PTET election for tax year 2023 and pays $1,000 of net PTET. The owners’ total available credits must be reduced by $60 ($1,000 x 6%). Therefore, the S corporation will report a total of $940 ($1,000 - $60) in refundable PTET credits to its owners.

  • (updated 9/18/2023)

    The PTET credits will be reported to the owners by the electing pass-through entity after it has filed and paid its PTET. The procedure for reporting these PTET credits to owners is different for tax year 2022 and for tax years 2023 and later.  

    Tax year 2022

    The electing pass-through entity will report each owner’s PTET credit to the owner on a 2022 Iowa PTET Credit Schedule after the entity files its 2022 PTET form in GovConnectIowa.

    Tax Years 2023 and Later

    The electing pass-through entity will report each owner’s PTET credit on the IA Schedule K-1.

  • (updated on 9/18/2023)  

    PTET credits are claimed by owners for the same tax year that the owners are required to report their associated IA Schedule K-1 income from that electing pass-through entity. If the tax year of the owner is different from the electing pass-through entity, the owner claims their PTET credit on their Iowa return for the tax year during which the electing pass-through entity’s tax year ends. PTET credits are treated as though they were paid equally throughout the owner’s tax year, similar to wage withholding credits.

    The procedure for claiming a PTET credit is different for tax year 2022 and for tax years 2023 and later.  

    Tax Year 2022

    Owners may claim a PTET credit they receive on a 2022 Iowa PTET Credit Schedule from an electing pass-through entity. Owners will utilize Iowa Schedule CC to report information about the PTET credit they received. Insert the phrase “(PTET)” after the paying pass-through entity name in Column A of the Schedule CC to signify that the credit claim relates to a PTET credit instead of a composite credit. Report the PTET credit on the appropriate return as follows:

    • Individual (IA 1040): Claim on line 62 and include Schedule CC
    • Individual (IA 1040X): Claim on line 23 and include Schedule CC
    • Fiduciary (IA 1041): Claim on line 41 and include Schedule CC; or claim on a PTE-C Composite Return, line 2, and include Schedule CC. Do not allocate your PTET credit to your beneficiaries.
    • Corporation, or Tax-Exempt Owner Subject to Iowa Unrelated Business Income Tax (IA 1120): Claim on Schedule C1, line 4, and include Schedule CC.
    • Franchise (IA 1120F): Claim on line 15 and include Schedule CC.
    • Partnership (IA 1065): Claim on the 2022 PTET form filed on GovConnectIowa if you are an electing entity; or claim on a PTE-C Composite Return, line 2, and include Schedule CC. Do not allocate your PTET credit to your owners.
    • S corporation (IA 1120S): Claim on the 2022 PTET form filed on GovConnectIowa if you are an electing entity; or claim on a PTE-C Composite Return, line 2, and include Schedule CC. Do not allocate your PTET credit to your owners.

    Tax-exempt owners subject to the Iowa unrelated business income tax (UBIT) under Iowa Code section 422.33(1A) may claim their refundable PTET credit on an IA 1120, even if the tax-exempt owner has no current-year UBIT liability. Select “UBIT” for the type of return on the IA 1120.  

    Any insurance company owner or credit union owner exempt from Iowa income tax under Iowa Code section 422.34 is not eligible to claim a PTET credit.  

    Tax Years 2023 and Later

    The procedure for claiming PTET credits will be provided on the appropriate Iowa tax return instructions at a later date.

  • (updated on 9/18/2023)

    Individual owners who received an Iowa income tax refund during the year and who filed a Schedule A with their federal income tax return in the tax year for which the refund was issued will receive a 1099-G. Any portion of the PTET credit attributable to that refund will be included in the 1099-G. See our guidance page on 1099s issued by the Department for more information.

  •  Yes. The franchise tax credit allowed to an electing pass-through entity that is a financial institution, as provided in section 1 of House File 352, will not prohibit qualifying owners of that financial institution from also claiming the Iowa Franchise Tax Credit on their own IA 1040, IA 1041, or IA 1120 using the IA 147 Franchise Tax Credit form.

  • Yes. An S corporation’s PTET election will not disqualify its resident individual shareholders or resident fiduciary shareholders from claiming the S Corporation Apportionment Tax Credit on their own IA 1040 or IA 1041 using the IA 134 S Corporation Apportionment Tax Credit form.

  • Yes, and they must report their distributive income from the electing pass-through entity on their Iowa tax return.

    House File 352 provides one exception to this requirement: A nonresident individual owner is not required to file an IA 1040 for the tax year if the individual’s only Iowa-source income is from one or more electing pass-through entities, and the PTET credits provided to the nonresident individual owner equals or exceeds the individual’s Iowa income tax liability for the tax year.

    This individual income tax filing exemption is in addition to other individual filing exemptions that may be available under Iowa law. For more information on other individual filing exemptions, visit Expanded Instructions - Who Must File? 

    These filing exemptions do not apply to estates and trusts (fiduciaries) filing an IA 1041.

  •  

    Information for Return Preparers on Completing the 2022 PTET Form

     

  • (updated on 9/18/2023)

    The 2022 PTET form must be filed on GovConnectIowa by an authorized person from the pass-through entity (see the FAQ above titled “Who makes the PTET election on behalf of the pass-through entity”). However, that authorized person may grant another person (preparer) the authority to complete and file the 2022 PTET form on behalf of the pass-through entity. The authorized person must complete the 2022 Iowa Pass-Through Entity Tax Electronic Filing Authorization Form to grant this authority. This authorization form does not grant a preparer the authority to discuss the 2022 PTET form with the Department. It also does not grant a preparer the authority to act on behalf of the pass-through entity beyond preparing and filing the 2022 PTET form. This form should be kept by the preparer and the pass-through entity. This form should not be submitted to the Department unless requested. 

  • (updated on 9/18/2023)

    You will need information from the pass-through entity’s filed 2022 income tax return (IA 1120S or IA 1065) to complete the 2022 PTET form on GovConnectIowa.

    The 2022 PTET form will include an Owner’s PTET Credit Schedule that reports every owner’s name, ID, and PTET credit amount. If you desire to prepare this schedule prior to filing your 2022 PTET form, you may complete the 2022 PTET Owners’ Credit Schedule Template, and then upload that template to GovConnectIowa during the 2022 PTET form submission process.  

    After filing the 2022 PTET form, the electing pass-through entity must send a completed 2022 Iowa PTET Credit Schedule to each owner.  

    If a preparer is filing the 2022 PTET form on behalf of the pass-through entity, the preparer will need a properly executed 2022 Iowa Pass-Through Entity Tax Electronic Filing Authorization Form