Article
A comprehensive look at new Mexico’s elective pass-through entity tax regime
May 14, 2023 · Authored by Dustin Hubbard, Phil Horwitz, Nick Hoffman
New Mexico Governor Michelle Lujan Grisham signed HB 102, creating an annual elective entity-level tax for New Mexico pass-through entities on March 8, 2022.
This election, first available for tax years beginning in 2022, allows certain pass-through entities, such as partnerships, limited liability companies (LLCs), and S corporations, to pay New Mexico state income tax at the entity level, rather than requiring each individual owner to pay tax on their share of the pass-through entity income.
Governor Lujan Grisham signed HB 368 on April 5, 2023, which enacted several changes to this election for tax years beginning in 2023 and beyond.
Background
The purpose of this election is to provide relief to small business owners who were negatively impacted by the 2017 federal Tax Cuts and Jobs Act, that limited the amount of state and local tax deductions that could be claimed on federal tax returns to $10,000.
By allowing a pass-through entity to pay state income tax at the entity level, rather than at the individual level, an entity is able claim a full deduction for state tax paid on its federal tax return.
Historically, the state tax due on an entity’s income would have been paid on the individual owners’ tax returns. In most cases, that state tax would not have been deductible on the owners’ federal returns due to the $10,000 cap.
How Do You Qualify for the New Mexico Pass-Through Entity Tax?
New Mexico’s regime is broader than that of some states by allowing most partnerships, S corps, and LLCs to make the election. Publicly traded partnerships, investment partnerships, and single-member LLCs aren’t eligible, nor is any entity electing to be taxed as a C corporation at the federal level. The only excluded pass-through entity owners are corporate partners that are unitary with the underlying partnership. In addition, PTEs don’t calculate tax on income that’s allocable to government, Tribal, or Section 501(c)(3) entities.
New Mexico adopts elective pass-through entity tax regime
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.