Reporting of Electing Pass-Through Entity Credits in a Tiered Partnership Structure

During the past week, many practitioners have reported issues and questions related to the manner in which certain tax return software packages are handling the credits from Electing Pass-Through Entities in a tiered partnership structure.  Representatives of the ASCPA notified the Alabama Department of Revenue (ADOR) of this issue and requested clarification regarding the reporting of Electing Pass-Through Entity credits for a situation in which an upper tier partnership did not make an election to be taxed at the entity-level.

Representatives of the ADOR have confirmed that the PTE credits from lower tier partnerships should be allowed to flow up to higher tier partnerships regardless of the partnership’s status.  If the higher tiered partnership did not elect to be taxed at entity-level, the credits would be claimed on Form PTE-C, line 5c.  The ADOR’s e-file coordinator has verified that there are no rules on their end which would prevent taxpayers from claiming the EPT credits.  The credits reported on line 5c of Form PTE-C are reported to the non-resident partners of the upper tier partnership on Part III, Line Z of the Alabama Schedule K-1.  However, the upper tier partnership will receive a refund for the resident partners’ share of the payments.

The ADOR representatives have indicated that Form PTE-C can be e-filed if there are non-resident partners, but if there are no non-resident partners, the PTE would need to file a Form PTE-C on paper to obtain the refund, as the current rules do not allow for a “zero” Form PTE-C to be e-filed.  The ADOR representatives have indicated that they will make changes to the e-file system next year so that a Form PTE-C with zero tax due (filed only to request a refund) will be allowed to e-file.