The IRS is shaking things up in S.A.L.T. The IRS intends to issue proposed regulations to permit a partnership or an S corporation to deduct specified income tax payments made to a domestic state or local jurisdiction.
In Notice 2020-75, the IRS clarifies that state and local income taxes imposed on and paid by a partnership or S corporation with respect to its income are allowed as a deduction when computing its non-separately stated taxable income or loss for the taxable year of payment, and are not subject to the state and local tax deduction limitation for partners and shareholders who itemize deductions.
The notice applies to these types of income taxes starting November 9, 2020, and also allows taxpayers to apply these rules to specified income tax payments made in a taxable year of a partnership or an S corporation ending after December 31, 2017, and before the date the forthcoming proposed regulations are published in the Federal Register.
This workaround to the state and local tax deduction limitation will provide a benefit to partners and S corporation shareholders in states that impose an entity-level tax on partnerships and S corporations. This is done by treating payments of those items by the pass-thru entity as a deduction by the entity, thereby reducing taxable income of the partnership or S corporation that ultimately flows to the partners or S corporation shareholders.
The SALT Deduction Limitation from the 2017 Tax Cuts and Jobs Act – which applies for taxable years beginning after December 31, 2017 and before January 1, 2026 – significantly impacts individual taxpayers who itemize deductions in states where income, property and sales tax rates are higher.
In an attempt to relieve taxpayers of the undue burden associated with the SALT Deduction Limitation, the IRS published Notice 2020-75 which permits partnerships and S corporations to deduct state and local income taxes imposed on the partnership or S corporation.
The Notice provides that a partnership or S corporation will be permitted to claim the deduction for state and local income taxes regardless of whether the state gives a full or partial tax credit, deduction or exclusion to a partner or S corporation shareholder and regardless of whether the state entity-level tax is mandatory or elective.
The Notice provides that the proposed regulations will apply to specified income tax payments made on or after November 9, 2020. The notice also provides that the proposed regulations will permit a deduction for specified income tax payments made by a partnership or S corporation for taxable years ending after December 31, 2017 and before November 9, 2020 provided that the income tax payment is made to satisfy a state and local tax liability imposed on the partnership or S corporation pursuant to a state law enacted before November 9, 2020.
Currently, six states have enacted an entity-level tax on partnerships or S corporations. Businesses in states that provide for an election to tax a partnership or S corporation at the entity level should consider whether to make such an election to take advantage of Notice 2020-75 and the forthcoming proposed regulations.
Reach Out To Us: The IRS is shaking things up in S.A.L.T. This is a meaningful step forward in the effort to buttress struggling business facing hardship due to COVID and the coming recession. We have innovative ideas and solutions for the challenges you and your business are facing. Contact our tax professionals today for timely tax planning tips as well as compliance advice at CPA@Fuoco.com or toll free: 855-542-7537.
