How do I make the election to pay pass-through entity tax under the SALT Parity Act for Colorado? Where does a shareholder/partner enter the amount on their individual return?
The SALT Parity Act allows electing S-corporations or Partnerships to elect to be taxed at the entity level which allows eligible shareholders/partners to take a credit on their individual return for taxes paid.
Per the Colorado Instructions:
"Beginning in tax year 2022, partnerships and S corporations may elect to be subject Colorado income tax at the entity level. The election is binding up all of the partners or shareholders. To make this election, check box I. The partnership or S corporation may also make the election by filing form DR 1705. Check the SALT Parity Election box on every Colorado K-1 issued to a partner or shareholder. If a partnership or S corporation makes a SALT Parity Act election, its tax liability must be calculated with respect to all partners or shareholders (resident and nonresident). Each partner or shareholder must also file a return. A partnership or S corporation that makes a SALT Parity Act election may not also make a composite return on behalf of nonresident partners or shareholders. Each partner or shareholder is allowed a credit against their Colorado income tax liability equal to the share of the tax imposed upon and paid by the entity with respect to the partner’s or shareholder’s income. All other credits are passed through to the partner or shareholder and must be claimed on the return filed by the partner or shareholder along with the refundable SALT Parity Act credit. When a partnership or S corporation makes the SALT Parity Act election, all partners or shareholders must add back any deduction taken under section 199A of the Internal Revenue Code."
1120-S or 1065
In Drake Tax, to make the election, go to CO screen 1 and mark the box Elect to be taxed at the entity level under the SALT Parity Act. Also, enter an amount in line 17 and/or 18, as applicable. On the CO > K1 screen, select each partner/shareholder and enter their share of the PTET on line 15.
- Form CO DR1705 generates.
- The amount carries to each partner/shareholder's CO DR106K form, line 15. The member will use this form to claim a credit on their individual return.
- Form CO DR900P generates in view mode. A variety of payment options are available:
- Submit the payment electronically through Drake Tax by completing the PMT screen,
- Make the payment online,
- Submitting the payment by mail. A check or money order may be mailed with Form CO DR900P to:
Department of Revenue
Denver, Colorado 80261-0008
Note that this election can be made annually. The election cannot be revoked for the tax year once made for that tax year.
In Drake Tax, open CO data entry > Credits/Rebates tab > screen CR3. Enter the credit amount on line 12. The credit amount will show on Form CO 104CR, line 12.
An override is available on CO, screen 2, line 3 if needed to adjust the Qualified Business Income Deduction Addback. Per the 104 Instructions,
"...you may be required to add back the amount of a deduction for qualified business income under section 199A of the Internal Revenue Code"
"If you are a partner in a partnership that made a SALT Parity Election (or a shareholder in an S corporation that made a SALT Parity Election), you are required to add to federal taxable income an amount equal to your qualified business income under section 199A of the Internal Revenue Code. You must add back the entire deduction regardless of your adjusted gross income. This addback is not limited to the deduction taken with respect to the electing partnership or S corporation. The partnership or S corporation will indicate that it made the election by marking the SALT Parity Election box on the Colorado K-1 (DR 0106K) issued to you. An amount on line 15 of the Colorado K-1 may also be an indication that the partnership or S corporation made this election."
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