How a PTE Election Can Save an MSP Owner Thousands in Taxes
▶️ Watch: When PTE Makes Sense - and When It Doesn't
Prefer to read? The key ideas from the video are expanded below.
One thing we do for new clients is compare the current-year tax return against the previous year line by line. While we were doing that for an MSP recently, something jumped out at me right away: their prior CPA hadn’t made a Pass-Through Entity Tax, or PTE, election.
PTE is an option that allows certain S corporations and partnerships to pay state income tax at the entity level. Depending on the state and the owners’ tax situation, that can allow those state taxes to be deducted for federal tax purposes.
In the right situation, it’s one of those rare things in tax planning where you’re not really changing the economics of anything. You’re just legally keeping more money.
A PTE Election That Could Save an MSP $6,000 a Year
In this particular case, we calculated that if the PTE election had been made last year, it would have saved the client about $3,000.
But because the business has continued to grow, this year it’s going to save them about $6,000. And as they continue growing, it could save them quite a bit more than that in future years.
Even if all this ever does is save them around $6,000 a year, that is still $6,000 the owner gets to keep. That could be a family vacation, an IRA contribution they otherwise might not make, or simply more cash staying in the business.
And this company is doing really well already. Six thousand dollars is not some massive, life-changing amount for them.
But having an extra $6,000 because they’re working with a CPA who is proactively looking for opportunities and thinking through these issues carefully? That matters.
The value is not just the PTE election itself. It’s having someone consistently looking for tax-planning opportunities as the business changes.
When a Pass-Through Entity Tax Election Makes Sense
The other thing that’s important to understand is that PTE is not something you automatically elect for every client.
Whether it makes sense depends on several things, including:
· The state
· The business structure
· Profitability
· The owners’ individual tax situation
There are also additional forms, elections, calculations, and payments involved, so it does take extra work.
It also isn’t something every accounting firm encounters with the same frequency. A lot of firms work primarily with individuals or smaller businesses where PTE may not be relevant very often.
For us, we work primarily with growing businesses, partnerships, and S corporations, so evaluating things like this is just part of our process.
Why PTE Needs to Be Evaluated Every Year
A lot of the value in tax work honestly comes from paying attention to details like this consistently over time.
For every eligible client, we look at whether PTE makes sense for them.
Sometimes it’s a huge benefit. Sometimes it’s minimal. Sometimes it’s not the right fit at all.
Should an MSP make a PTE election? It depends on the business and the owners’ individual tax situation. That is why it needs to be evaluated rather than assumed.
But it’s not uncommon for us to find opportunities like this where some additional analysis and work on our side can save clients thousands of dollars.
Most of that extra work happens behind the scenes. From the client’s perspective, the end result is simple: they keep more of their money.
And that is where a lot of proactive tax planning creates value. It is not always one massive tax strategy. Often, it is finding opportunities like this consistently over time and making sure the business is taking advantage of them when they make sense.
This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.
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