MT DoR Reminds Pass-Through Entities of Proper Treatment of Pass-Through Entity Tax Overpayments

As the department processes the over 48,000 Forms PTE received for tax year 2024, one of the most common adjustments they have made is to tax returns pushing overpayments of pass-through entity tax (PTET) payments to affected owners. Overpayments of the pass-through entity tax (PTET) cannot be allocated to affected owners. When a pass-through entity elects to pay PTET and records payments in excess of PTET legally owed, that overpayment must be refunded to the entity.

Lately they have seen a number of Forms PTE with a PTET election where the entity reports an amount of PTET credit on the Schedules K-1s issued to the owners that is greater than the amount of PTET legally owed by the entity. This practice disregards the tax benefit rule and is not permitted. Section 15-30-3326(2) MCA provides that the amount of tax allocated to affected owners is the amount of PTET assessed, or legally owed by the entity, not the amount the entity paid. The difference is always refunded to the entity.

PTET payments may occur through estimated, flow-through, or carryover payments. The pass-through entity cannot allocate the overpayment of PTET to its affected owners. PTET is calculated at the highest marginal tax rate of the distributive share of the Montana source income attributable to all affected owners. The rate is 6.75% in tax year 2023 and will decrease to 5.9% in tax year 2024.

The department is adjusting all returns allocating more PTET than the amount resulting from the calculation method laid out in section 15-30-3326, MCA. Pass-through entities will receive a notice from the department if their return is adjusted for this reason.

For more information about the treatment of PTET, see their website and Publication 4.