2025 Tax Outlook: State and Local Taxes

We expect 2025 to be a noteworthy year for tax legislation. Many of the provisions in the Tax Cuts and Jobs Act (TCJA) are expiring, and lawmakers are tasked with determining whether those provisions should be renewed, reformed, or allowed to sunset. President Trump has floated the idea of extending those provisions, but he has other priorities that could take precedence.

This year, we’ve noted a few changes to a few popular credits and incentives, and we expect more Federal tax legislation to crop up in 2025. But it’s not just the Federal tax landscape that’s changing. State governments are making changes, too. Here are a few things to think about when it comes to state and local taxes.

Pass-Through Entity Taxes

Pass-through entity taxes (PTETs) were created by state governments to help their residents circumvent the Federal $10,000 state and local tax (SALT) deduction cap. PTETs should be on your radar if you’re a business owner — at least through the end of next year. The $10,000 SALT deduction cap expires at the end of 2025, which means that in 2026, PTETs may no longer be needed. But until then, they’re a strategy you should consider.

When 2024 began, 36 states and 1 locality had enacted a PTET. Although no new states enacted a PTET this year, Connecticut’s became optional (it had been mandatory since 2018), and three states proposed PTET bills during their 2024 legislative sessions:

• The Maine legislature carried a PTET bill from the 2023 legislative session into 2024, but it was amended to be a study bill. This merely requires the legislature to dedicate time and resources to studying the topic before drafting a future bill.
• The Pennsylvania legislature also carried a PTET bill from the 2023 legislative session into 2024, but after that bill’s contents were referred to the Appropriations Committee, the PTET language was removed before the budget bill was passed.
• The Vermont legislature introduced a PTET bill that made it through the Senate, but it didn’t make it through the House before the legislative session ended.

Delaware and North Dakota, the only two other states that offer a personal income tax, have not yet introduced PTET bills.

It’s possible that one or more of these jurisdictions will pass a PTET bill in 2025. If they do, check to see if amended returns are permissible. Most states’ PTETs have been retroactive, meaning that taxpayers have been able to amend prior year returns to take advantage of the opportunity. So… even though there is only one year left before the $10,000 SALT deduction cap expires, it’s good to keep an eye on state PTET changes in 2025.

So now the question can be asked: should you elect into any PTETs? Here are a few things to think about.

• Keep an eye on new Federal legislation.
  The $10,000 SALT cap will expire at the end of 2025, but it’s possible this limit will be renewed. Most PTETs are annual elections, so it should be easy to revert to standard tax filings in 2026.
• Every PTET is different.
  PTETs are state-level taxes, and each state’s tax laws are slightly different. Don’t assume that just because you understand one state’s tax, you understand another’s.
• Most states offer reciprocity.
  Initially, there was concern that taxpayers would not be able to claim a credit in their home state for PTET taxes paid on their behalf in another. But most jurisdictions allow “taxes paid to other states” credits for PTET taxes.
• Calculating the benefits of a PTET election is complex.
  There are many factors to consider when determining if a PTET election is right for your business and its owners. For example, a PTET election in one state may benefit only some of your owners but could cost the business hefty tax preparation fees. You need to determine if the costs are worth it.

Jurisdictional Nexus

Thanks to a series of factors — the ecommerce boom of the early 2000s, the COVID-19 pandemic encouraging remote work, or businesses’ increased comfort with expanding outside of their home state, just to name a few — nexus is a hot a topic of discussion in the tax world.

Nexus, or the sufficient connection you must have with a jurisdiction before being subject to its tax laws, is a key concept for any multistate business to understand. Failure to consider your tax exposure in other states could cripple your business. That’s why nexus studies are so important.

Nexus studies do two things.

First, they identify potential exposure. They not only show you where you have filing responsibilities, but they also estimate the amount of taxes you owe in those jurisdictions.

Next, they explore solutions. If you determine you have a filing responsibility in another state, the team performing your nexus study can explore how to resolve those issues.

The nexus study process looks like this:

1. Initial Discussion
   When you meet with your research team for the first time, they will talk to you about how nexus studies work so you can determine if you want to move forward.
2. First Analysis
   In this initial analysis, you’ll provide broad information about your business activity so that your tax team knows how to tackle the project.
3. Research
   The team will dig deeper into your business, performing calculations to determine your exposure.
4. Official Analysis
   In this official analysis, your team will not only identify where you have nexus, but they will also quantify your exposure in those jurisdictions.
5. Potential Resolutions
   After discussing your exposure, the team will talk to you about the possible ways you can resolve your filing deficiencies.
6. Next Steps
   With all the information at hand, you and your tax team will determine next steps. For many taxpayers, this is making a plan for coming into compliance — building a schedule to create tax accounts and file in new states over the coming months or years.

Other SALT Concerns

Multistate businesses have other SALT issues to consider, like how states are changing their apportionment calculations, or how states are treating remote workers. In Ohio alone, businesses should also be thinking about:

• Changes to the Ohio Commercial Activity Tax
• Changes to the Ohio PTET
• Changes to Ohio’s income tax brackets

For more information on what to expect for 2025 state and local taxes, contact us today.