- Pass-Through Election (PTE)– Many states now allow pass-through entities t0 pay state taxes on behalf of partners/shareholders as a workaround to the $10,000 state and local tax deduction limitation on personal tax returns. Rules vary by state. The CO rules are summarized below. If your business files in multiple states and you are interested in the PTE election, we can research the rules in the other states for you.
- If the business pays the CO PTE tax, the Qualified Business Income (QBI) deduction must be added back on the partner/shareholder’s personal CO tax return. This often negates the PTE benefit, so it doesn’t work for everyone. Careful evaluation is required on a case by case basis.
- All partners/shareholders/members must participate if the election is made.
- Beginning in 2023, CO required that PTE estimated tax payments be made if tax for year exceeds $5,000.
- The business deducts the CO PTE tax on the return in the year paid.
- The partner/shareholder receives a credit on the CO personal tax return in the year of the election.
- If you have not elected PTE or made estimated PTE tax payments, we can evaluate whether you will receive benefit from making the election and paying the tax when your business return is filed.
- Forms K-2/K-3 – These forms are required to be prepared if your business had foreign activity during the year or if a partner/shareholder requests the Form K-3 for their personal tax filings.
- S-Corporations (the following items do not apply if you are taxed as a partnership).
- Reasonable Compensation – If you are providing services for the S corporation and taking distributions of any kind from your S-Corporation, the IRS requires that you pay yourself a reasonable salary (reported on a W-2) before taking profit distributions. Reasonable compensation reflects what you would pay to hire someone to do your job. The amount of time you spend working and how much of the work is high-skill versus low-skill is considered. Please let us know if you would like more information.
- S-Corporation health insurance premiums for shareholder-employees – In order to obtain the most favorable tax deduction for health insurance premiums for shareholder-employees, the cost of employer-paid health insurance for shareholder-employees must be reported in boxes 1, 14, and 16 of the shareholder-employee’s W-2. (Spouses and children of owners also fall under this requirement if they are employed by the business.) This reporting requirement is not taxable to the business or the shareholder-employee but is, rather, just a reporting requirement. If the business has not been paying your health insurance premiums directly, please arrange for the company to reimburse you for all premiums before year-end. It’s expensive to correct W-2s after they have been filed and reported, so it is imperative to ensure all employee and wage information is correct before the last payroll of the year and before W-2s and 4Q 2023 payroll returns are filed.
- HSA – If your health insurance plan is HSA-eligible, fully funding an HSA is one of the best tax-saving strategies available. Employer contributions to the HSA of a 2% or more shareholder-employee are treated as health insurance and listed on the W-2 (similar to health insurance above). Alternatively, you can make contributions personally. Unlike health insurance, there is no requirement for the company to be involved with HSA contributions.