NEWS & INSIGHTS
May 2025 SALT Pass-Through Entities Report: Entity-Level Taxes, Audit Regimes, and MTC Updates
The ABA State and Local Tax Committee’s Pass-Through Entities Subcommittee delivered its latest report on May 8, 2025, offering a deep dive into the ever-evolving state tax treatment of partnerships and S corporations. Authored by Kelvin Lawrence, Alysse McLoughlin, and Will Thistle, the report covers recent developments across multiple jurisdictions and touches on PTE-level taxes, sourcing rules, audit regimes, and apportionment issues.
🏛️ I. Entity-Level Taxes: The Push Continues
States continue to adopt and amend pass-through entity (PTE) tax regimes to address the federal SALT cap. Notable developments include:
- Arkansas: Clean-up legislation amended the elective PTE tax structure passed in 2023, clarifying eligible entities and tax treatment.
- Hawaii: Proposed but failed to enact an elective PTE tax in 2024. The proposal remains under study.
- Illinois: SB 3321 would amend the PTE tax to include tiered partnerships. The bill is still pending as of May 2025.
- Virginia: Proposed legislation to broaden eligibility and clarify the PTE tax base failed in early 2025, but is expected to return in the next session.
🧾 II. Sales Tax: Agency and Related Party Issues
Texas courts continue to review the taxability of services between related entities. A recent administrative law ruling concluded that a management company operating under a cost-plus model for an affiliated apartment complex was not exempt from sales tax. The ruling emphasized “direct payment” and agency agreement language.
🏢 III. Property Tax: Disregarded Entities vs. Owners
Several jurisdictions are reevaluating how real property held by disregarded entities is treated. Key issues include whether the disregarded entity or its owner is considered the “owner” for exemption or classification purposes. Michigan and North Carolina have each published guidance limiting exemptions when property is held by a disregarded LLC.
💼 IV. Investment Partnerships: Apportionment and Source Debate
Questions persist about whether income from investment partnerships should be sourced to the location of the partnership or to the residence of the investor. California, New York, and Oregon continue to apply different rules depending on the nature of the income and the entity’s business activities. Recent litigation in New York (not yet published) may further clarify the issue.
🔄 V. Miscellaneous Notes
- Massachusetts DOR published guidance confirming that guaranteed payments are not subject to the state’s new surtax.
- Georgia amended its rules to allow direct credit for PTE taxes paid to other states.
- New Jersey is studying a legislative proposal to allow amended returns for PTE taxpayers following IRS audit adjustments.
🏛️ VI. MTC Partnership Project and Model Updates
The Multistate Tax Commission (MTC) is revising its model partnership apportionment rules. The ABA SALT Committee submitted comments urging clarity on tiered partnerships, guaranteed payments, and sourcing of non-business income. States are closely watching the MTC’s final draft, which is expected later in 2025.
🧑⚖️ VII. State Adoption of Federal Audit Rules
Several states have adopted or adapted the centralized partnership audit regime (CPAR) created under the Bipartisan Budget Act of 2015:
- California: Full adoption, including procedures for tiered partnerships.
- Colorado: Still implementing conforming legislation for 2024 tax years.
- New York: Released additional draft regulations in January 2025, with stakeholder comments due in March.
- Texas: Has not adopted CPAR, but is considering legislation after a 2024 Comptroller report highlighted audit gaps.
📌 Final Takeaway
The May 2025 report underscores that state-level taxation of partnerships remains a moving target. From expanding PTE taxes to conforming audit rules, taxpayers and practitioners alike must navigate a patchwork of inconsistent and evolving policies. With further MTC and state guidance expected, pass-through entity taxation is set to remain a SALT hot topic for the remainder of 2025.
Moffa Tax Law | Florida State and Local Tax Attorneys
A report presented by the ABA SALT Subcommittee on Pass-Through Entities summarizing tax developments across states for partnerships and S corporations.
Elective taxes paid at the entity level by partnerships or S corporations to help owners bypass the federal SALT deduction cap.
Arkansas, Illinois, and Virginia proposed changes, while Hawaii failed to pass new legislation.
The Multistate Tax Commission is revising model rules for sourcing and apportioning partnership income, with input from ABA stakeholders.
Some states (e.g., California, New York) have fully conformed, while others (e.g., Texas) are still evaluating the federal regime.
Because disregarded entities and LLC structures can complicate exemption eligibility, especially for real property.
A partnership that primarily holds investment assets rather than engaging in an active trade or business.
It depends on the state. Some source to where the entity operates; others use investor residency.
Lack of uniformity. Rules differ by state on eligibility, credits, and interaction with tiered structures.
Expect further legislative tweaks, litigation on sourcing, and finalized MTC model updates by late 2025.
Share
Additional Articles by the SALTy Orange at Moffa Tax Law:
SALT on the Shore: Florida State and Local Tax in Focus The Florida Bar Tax Section is presenting “SALT on…
NEWS & INSIGHTS Testing Discretionary Review at the Florida Supreme Court: An Emerging Trend at the Florida Department of Revenue?…
FLORIDA TAX NEWS Florida Corporate Income Tax Update: Adoption of the 2025 Internal Revenue Code and Key Modifications Florida has…
Jeanette Moffa, Esq.
(954) 800-4138
JeanetteMoffa@MoffaTaxLaw.com
Jeanette Moffa is a Partner in the Fort Lauderdale office of Moffa, Sutton, & Donnini. She focuses her practice in Florida state and local tax. Jeanette provides SALT planning and consulting as part of her practice, addressing issues such as nexus and taxability, including exemptions, inclusions, and exclusions of transactions from the tax base. In addition, she handles tax controversy, working with state and local agencies in resolution of assessment and refund cases. She also litigates state and local tax and administrative law issues.