M&A Structuring Opportunities Utilizing State Level Pass-Through Entity Tax Regimes

State-level pass-through entity tax (PTET) regimes offer structuring opportunities in M&A transactions involving S corporation targets. PTET regimes have been adopted by a growing number of states as a workaround to the $10,000 limitation imposed on the deductibility of state and local taxes from individuals' federal income tax liability (the SALT Cap) as part of the 2017 federal tax reform (commonly known as the Tax Cuts and Jobs Act).¹ The PTET regimes can provide significant tax savings opportunities to sellers of targets treated as S corporations in connection with M&A deals structured as asset sales for income tax purposes, thereby better aligning sellers' after-tax objectives with buyers' traditional preference for inside tax basis step-up.