How Pass-Through Entities in Idaho Can Benefit From Affected Business Entities (ABE) Law

by Alison Suko

Do you own an interest in an S Corporation, Partnership, or Limited Liability Company taxed as a Partnership? If it operates in Idaho, it may qualify as an Affected Business Entity (ABE). Many businesses taxed as S Corporations or Partnerships, currently pay distributions to their owners in order to pay the taxes on the business taxable income. Because distributions are not deductible from taxable income, the taxes are paid by the source, but there is no tax benefit.

On April 15, 2021, Governor Little signed House Bill 317, now Idaho Code Section 63-3026B “Affected Business Entities – State and Local Taxation Treatment.” This new law allows certain pass through entities like those mentioned above to pay Idaho state income taxes on the owner’s share of the business income at a flat 6.5% rate. This tax is deductible on the pass through owner’s federal tax return. It is not deductible on the owner’s Idaho tax return, but instead is treated as a credit toward the taxes due by the owner.

An annual election must be made on the pass through entity’s original, timely-filed Idaho tax return. Once the election is made, it is irrevocable for that tax year. The election must be signed by all members of the electing entity or by an officer, manager, or member with authorization to make these decision on behalf of all other owners.

Payments can be made using the Idaho State Tax Commission’s QuickPay, a business’ existing TAP account, or by mailing in a check with Idaho Form 41ES. The entity’s tax must be paid prior to the filing of the owner’s tax return in order to be applied to a return filed for the same year. ABE payments are deductible in the year they are paid, so a payment made before December 31, 2022 will be deducted on the owners 2022 tax return. If the amount paid is more than the owner’s Idaho tax liability, the excess is refunded.

If you own an interest in a pass through entity and are looking for ways to lower your federal income tax bill, you may want to consider whether an ABE election would work for you. Contact your tax professional to see if this is an option for you and how much tax could be saved.

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