Montana Pass-Through Entity Tax 2023 - 2024
Montana recently enacted a new pass-through entity tax. The law allows an electing PTE to make an annual election to pay entity tax at the highest marginal rate for the tax year. The election is irrevocable.
The Montana Department of Revenue released a guide on the new pass-through entity tax (PTET) for partnership and S corporations. This elective tax is paid by the PTE on its owners’ distributive share of Montana-sourced income. It is a replacement for composite and withholding taxes. Montana’s PTET rate is 6.75%.
In addition to the PTET, Montana has a 3% earned income credit for low-income taxpayers. The credit is refundable and can be used to offset federal income tax liability. Montana’s PTET is effective for taxable years beginning on or after January 1, 2023. The PTET must be made annually (guidance has not yet been provided on the due date) and is irrevocable for the year in which it is made.
The PTET is calculated on an electing PTE’s owner-reportable net state business income for the tax year, based on each owner’s distributive share of that entity’s Montana source income as reflected on its information return. A taxable PTE must make an election to subject itself to the PTET on its timely filed tax return, Form PTE.
How Does Montana PTET Work?
SB 554 was passed by the 68th Legislature and is set to become law soon, making Montana the latest state to adopt a pass-through entity tax (PTET). Under this new election, an electing PTE can make an annual choice to pay an entity level tax on their owners’ distributive share of Montana source income. The tax is based on the highest marginal rate of the current tax year, which will be 6.75% for 2023 and then reduced to 5.9% in 2024. The election is made on a timely filed PTE return and, once made, is irrevocable.
Electing PTEs must file quarterly estimated taxes; their liability is subject to underpayment interest and penalties. Nonresident owners must make a PTE return if their Montana source income is subject to PTET.
In addition to PTET, Montana has its own corporate income and excise taxes. Moreover, it levies a minimum corporation license fee of $10 for domestic and foreign corporations. It also imposes an unemployment insurance tax on domestic second-tier pass-through entities that are subject to PTET, and uses single sales factor apportionment for all other corporations.
How To Make Montana PTET Payments?
Electing entities must make estimated PTET payments quarterly. The due dates are June 15, September 15, and January 15. These payments must be remitted on Form PTE. The tax due is based on the owner’s distributive share of Montana source income, which is calculated using the rate provided in 15-30-3302 for each owner.
The Department of Revenue has released a news release on the PTET that provides additional information about the entity level PTET. It includes clarifications about what income is taxable and how the credit will flow to owners’ MT Schedule K-1s.
