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Editorial 9 MIN READ

The PLLC in mid-2021: three things changed, two did not

A reporting regime arrived, a pass-through tax workaround got IRS blessing, and the 199A door stayed shut on the same professions

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 5 sections
  1. What the Corporate Transparency Act does to a PLLC
  2. The Section 199A wall is still up
  3. Why IRS Notice 2020-75 matters for an S-elected PLLC
  4. What a PLLC owner should actually do in July 2021
  5. Sources

wenty months after our last PLLC field report, the structure looks the same on the state statute books and different almost everywhere else. A professional limited liability company formed in July 2021 inherits a federal reporting obligation that did not exist in December 2019, a state-level pass-through tax regime the IRS has now explicitly blessed, and the same Section 199A wall that blocked the deduction the first time we wrote about these entities.

If you formed a PLLC in 2019 and have not looked at it since, the governance and tax files need a small but real update. None of the changes make the PLLC a worse vehicle. Two of them make it a better one if used with intent.

What the Corporate Transparency Act does to a PLLC

Congress enacted the Corporate Transparency Act on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021, over a presidential veto. The operative provision is codified at 31 U.S.C. § 5336. Every "reporting company" within the statute's reach must file beneficial ownership information with FinCEN, the Treasury's Financial Crimes Enforcement Network.

A PLLC is a "reporting company." The statute defines the term as any corporation, limited liability company, or similar entity created by the filing of a document with a secretary of state or similar office. 31 U.S.C. § 5336(a)(11)(A). A professional LLC is an LLC organized under a state's professional entity statute. The professional overlay does not remove the entity from LLC status; it adds a licensing layer on top. A New York PLLC under N.Y. LLC Law § 1203, a Texas PLLC under Tex. Bus. Orgs. Code § 304.001, a California RLLP or professional corporation (California does not authorize PLLCs, which is the reason dental and medical groups there use professional corporations) are all formed by a filing with the state. That filing is the trigger.

The statute enumerates 23 exemptions at § 5336(a)(11)(B). Most of them are irrelevant to a professional practice. Three deserve a close read. The "large operating company" exemption at § 5336(a)(11)(B)(xxi) requires more than 20 full-time employees in the United States, an operating presence at a physical U.S. office, and more than $5 million of gross receipts reported on the prior year's federal tax return. A three-dentist PLLC with two hygienists and a front-desk manager will not clear the 20-employee threshold. A regional accounting firm with 35 staff and $8 million in billings will. The "accounting firm" exemption at § 5336(a)(11)(B)(xv) covers public accounting firms registered under section 102 of the Sarbanes-Oxley Act; that is a narrower set than "any CPA firm." The "pooled investment vehicle" and "tax-exempt entity" carve-outs at § 5336(a)(11)(B)(xviii) and (xix) rarely apply to professional practices.

Most PLLCs will report. The information required under § 5336(b)(2) covers the beneficial owners (anyone exercising substantial control or holding 25% or more of the ownership interests) and, for entities formed after the effective date, the company applicant who made the filing. Reportable items include full legal name, date of birth, current residential or business street address, and a unique identifying number from a passport, driver's license, or state ID.

FinCEN has not yet finalized the implementing rule. The agency published an Advance Notice of Proposed Rulemaking on April 5, 2021 (86 Fed. Reg. 17557), and is working toward a proposed rule. Until that rule is final, there is no filing portal and no specific deadline. The statute itself contemplates an effective date tied to the final regulation. The point for a PLLC owner in mid-2021 is not to file anything now; it is to know the regime is coming and to keep ownership, control, and ID information clean. If your operating agreement is vague on who has substantial control, fix it before the rule lands.

For context on how the PLLC structure has held up through earlier waves of regulation, our 2016 overview of PLLCs for licensed trades covers the base mechanics, and the 2018 revisit traces what the Tax Cuts and Jobs Act did to the form in its first year of operation.

The Section 199A wall is still up

For the professions most likely to form a PLLC, the qualified business income deduction under 26 U.S.C. § 199A remains inaccessible above the income thresholds. Nothing about that has changed since 2019.

Section 199A(d)(2)(A) defines a specified service trade or business to include any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and "any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners." § 199A(d)(2)(A). A separate SSTB catch-all at § 199A(d)(2)(B) covers investing, investment management, and securities trading.

The SSTB categories overlap almost exactly with the professions for which states require a PLLC: physicians and dentists in health, attorneys in law, CPAs in accounting, and so on. Architects and engineers were specifically carved out of the SSTB definition by the statute itself, and the final regulations at Treas. Reg. § 1.199A-5 confirm the exclusion. Most other licensed professions sit squarely inside the wall.

The inflation-adjusted thresholds for 2021 taxable income are $164,900 for single filers and $329,800 for joint filers. Rev. Proc. 2020-45, 2020-46 I.R.B. 1016. Below the threshold, an SSTB owner gets the full 199A deduction. In the phase-in range (the next $50,000 for singles, $100,000 for joint filers), the deduction scales down. Above the upper end of the phase-in, an SSTB owner gets nothing. The practical effect for a successful PLLC is that the 20% deduction disappears the moment the practice's owner-level income clears the threshold.

None of this is new. We walked through the mechanics in the 2019 PLLC field report. The reason to revisit it here is that a 2021 PLLC owner may have heard about the "SALT cap workaround" discussed in the next section and assumed it somehow fixed 199A. It does not. The SALT workaround is a federal-tax benefit that moves the deduction for state income taxes from the individual return (where $10,000 is the ceiling) to the entity return (where the deduction is uncapped). It does not resurrect the QBI deduction for professionals whose income exceeds the § 199A(d)(2) thresholds.

Why IRS Notice 2020-75 matters for an S-elected PLLC

This is the live change for most profitable PLLCs in 2021. Since the TCJA capped the state and local tax deduction at $10,000 for individuals under § 164(b)(6), several states enacted a pass-through entity tax, or PTET. The mechanics are consistent state to state: the partnership or S-corporation elects to pay state income tax at the entity level, deducts that payment as a business expense on the federal return under § 164, and passes a state-level credit or subtraction through to the owners. The federal deduction is uncapped because it sits above the line at the entity; the cap at § 164(b)(6) applies only to individuals.

Whether the IRS would respect this structure was unresolved until November 9, 2020, when Treasury and the IRS released Notice 2020-75. The notice announces that forthcoming proposed regulations will clarify that "Specified Income Tax Payments," defined in section 3.02(1) of the notice as any amount paid by a partnership or an S corporation to a state, a political subdivision of a state, or the District of Columbia to satisfy its liability for income taxes imposed by the state or jurisdiction on the partnership or S corporation, are deductible by the partnership or S corporation in computing its non-separately stated taxable income or loss for the year of payment. IRS Notice 2020-75, section 3.02.

That is a full-throated blessing. The notice applies to payments made on or after November 9, 2020, and to payments made in earlier tax years ending after December 31, 2017, if the payments were made pursuant to a state law authorizing a PTET enacted before November 9, 2020.

For a PLLC to use this, two conditions matter. First, the PLLC must be taxed as an S corporation or as a partnership. A single-member PLLC that has never filed Form 2553 is a disregarded entity, and Notice 2020-75 does not reach disregarded entities. The fix is straightforward: file Form 2553 to elect S status (late-election relief under Rev. Proc. 2013-30 is available in most cases) or admit a second member and file as a partnership. Second, the PLLC's state must have a PTET statute. As of July 2021, Connecticut, Louisiana, Maryland, New Jersey, New York, Oklahoma, and Rhode Island have enacted PTETs, with more in the pipeline; New York's election under Tax Law Article 24-A, added by Chapter 59 of the Laws of 2021, took effect for tax years beginning on or after January 1, 2021, with a first-year election deadline of October 15, 2021.

The math matters. A New York PLLC with $500,000 of ordinary income and two equal owners at the 6.85% state rate owes roughly $34,250 in state tax at the entity level. Paid by the individuals, $10,000 of it is federally deductible and the remaining $24,250 is not. Paid by the entity under the PTET, the full $34,250 is deductible on the federal partnership or S-corp return before it flows through to the owners. At a 37% federal rate, that extra federal deduction is worth roughly $8,970 a year that the owners would otherwise have paid in federal tax. This is not small money, and it is waiting for the S or partnership election to turn it on.

What a PLLC owner should actually do in July 2021

Three things, in order. First, pull the operating agreement and the cap table and confirm who qualifies as a beneficial owner under the CTA's "substantial control" and "25% ownership" tests. Silent partners at 30% count; managing members with no equity may count if they exercise substantial control. The FinCEN rule is not yet final, but when it arrives, the information has to be correct at first filing.

Second, look at the entity's federal tax classification. A disregarded PLLC with growing profit should be modeling an S election, not only for the reasonable-compensation split that shrinks the SECA tax base (our 2018 revisit walks through that math) but now for PTET eligibility in states that have one. If the PLLC already elected S status, confirm the PTET election rules for the state. New York's first-year deadline is October 15, 2021; other states have their own calendars.

Third, do not rearrange the business around Section 199A. The SSTB exclusion is a statutory floor that the regulations have not softened. The "crack and pack" strategies of reorganizing an SSTB into a non-SSTB related business were addressed and largely shut down by Treas. Reg. § 1.199A-5(c)(2), which treats an SSTB and a related non-SSTB as a single SSTB if the non-SSTB provides more than 80% of its services or property to the SSTB and the two share 50% or more common ownership. A dental PLLC that spins off its building into a real-estate LLC and pays above-market rent does not get the deduction back; it gets a Section 1.199A-5(c)(2) problem.

The PLLC is still the right vehicle for most licensed-trade practices that want LLC-style governance and the state licensure board's approval. The July 2021 version of that vehicle just carries one new reporting chore coming down the road and one real federal-tax lever that did not exist the last time most of these entities were reviewed.

Sources

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