Since the passing of the Tax Cuts and Jobs Act in 2017, several states have enacted or are contemplating enacting pass-through entity taxes (PTETs) as workarounds to the $10,000 cap on the federal state and local tax deduction. One key item that needs to be considered before taking advantage of these PTETs is whether the resident state of the pass-through entity individual owner permits a credit for taxes paid related to the PTET. There are several states where uncertainty has existed around the creditability of such taxes – and these states have been approaching the issue differently. Some have issued guidance either allowing or disallowing a credit, others are enacting legislation permitting a credit, and some are just staying silent. Until recently, the District of Columbia fell into that latter category.

However, on March 31, 2022, pressured by the barrage of requested private letter rulings on the issue, the District of Columbia's Office of Tax and Revenue released guidance (OTR Tax Notice 2022-03) addressing the District of Columbia's treatment of PTET paid to other jurisdictions. The guidance provides blanket creditability for PTETs, both elective and mandatory, so long as they are "akin to an individual income tax" and not one of the enumerated tax types (or characterized as such).

This is an important development for pass-through entities that have elected into one or more states' PTET regime and have resident District of Columbia partners. It also provides a framework through which other states may approach the creditability of these taxes where the law is unclear.

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