PTE Taxes and HUD

AHACPA continues to receive questions regarding the treatment of State and Local Taxes (SALT) previously paid by participants in pass-through entities such as partnerships, LLCs or Sub-S corporations (PTEs). Prior to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), payment of income and other taxes was made by project owners for income passed through the project. Subsequently, the passage of the TCJA meant that individual deductions for SALT items were limited. With about 30 states having passed legislation on PTEs, projects are now allowed to pay these taxes directly for the owner. Consequently, projects are attempting to claim that such payments are now project expenses. Since many of these amounts are material, we are left to determine how this change affects our compliance testing.

AHACPA has not previously taken a position on this topic, anticipating that HUD might issue a policy statement. At this time however, no statement has been provided. Therefore, with deadlines approaching, and having consulted with various firms, we feel it is necessary to remind everyone of a few items regarding the TCJA:


In 2017 Congress passed the Tax Cuts and Jobs Act of 2017. The enactment of the TCJA capped the deduction available to individual taxpayers under IRC Section 164 for tax years beginning after 2017 and before 2026. The deduction is limited to $10,000 ($5,000 in the case of a married individual filing a separate return) for the following state and local taxes:

  • Income taxes, or general sales taxes if elected instead of income taxes
  • Real property taxes
  • Personal property taxes

As of 2023, approximately 30 states have implemented workarounds to the SALT cap with various approaches.

The owners of a PTE typically pay the taxes on the project’s taxable income. This has been HUD’s position for as long as we have had policy statements. This new option allows eligible PTEs to shift the payment of state income and other taxes to the project itself. Those taxes can then be fully deducted for federal tax purposes by the project. The deduction is then passed through in the distributive share of the PTE owners’ income, which is now lower. At the state level, the laws regarding these elective taxes usually allow the owner to:

  • Claim a credit for the amount of the owner’s distributive share of the taxes paid by the PTE; or
  • Allow the owner to exclude their distributive share of the PTE’s income.

Near the end of 2020, the IRS issued Notice 2020-75 announcing its plan to propose regulations that acknowledge certain PTEs are not subject to the $10,000 SALT deduction limitation imposed by the TCJA.

Impact on HUD Projects

Primary guidance from HUD starts with the current Regulatory Agreement (Form HUD-92466M (6/18)) which defines project expenses as follows:

“Reasonable Operating Expenses” means the reasonable expenses and payments that arise from the purchase of goods or services which are exclusively used for the operation, maintenance, and routine repair of the Project (including all payments and deposits required under this Agreement, the Note, or the Security Instrument, or as otherwise permitted by Program Obligations.

This continues into the current chart of accounts which lists income taxes in account 7130 – Federal, State, and Other Income Taxes. The description states that, “this account reflects federal and state income tax and other corporate/entity taxes of the mortgagor entity for the tax year”.

Until the aforementioned changes, there has been no serious argument that partner’s income taxes should be considered a project expense. Nothing in the legislation changes the basic principles on SALT payments. Taxes are still payable by project owners. This is evidenced by the fact that owners must claim a credit on their return for the PTE’s payments. The very structure of the process continues to support HUD’s position that such payments should not be considered as reasonable and necessary project expenses.

GAAP Consideration

An AHACPA member has reminded us that there is also a GAAP argument supporting this position. This is outlined in ASC 740-10-55 paragraphs 226-229 which clearly show that under these circumstances, proper GAAP treatment is to show the taxes by the project as payments made on behalf of the owners and therefore, these taxes are to be shown to be shown as entity items and not project expenses.


Despite the changes in state law, there are no serious arguments that the nature of the tax has changed. We also know that it is a violation of GAAP to present it as such. Such payments should not be considered project expenses. Owners may be insistent that such amounts should be project expenses–absent any specific guidance from HUD to the contrary. Hopefully, the contents of this email may help with those arguments.

It should also be noted that the cost of preparing partner tax returns is listed as equity skimming (See Appendix B to Chapter 3 of theHUD Audit Guide). If HUD extends that logic to the actual tax payments, then payments of these taxes would also be equity skimming.  Consequently, there would be no materiality limit, and any amounts paid would require a finding as well as a potential notice to HUD OIG in accordance with the Guide.

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