Plans for pass-through entity SALT cap workaround
The Treasury and the IRS plan to release proposed regulations that will allow a pass-through entity’s (S corporations and partnerships) state and local income tax deduction in determining the entity’s non-separately stated taxable income or loss for the taxable year paid or accrued, according to their recently released Notice 2020-75.
What does this mean?
It means the state and local income taxes imposed on a pass-through entity paid or accrued in the taxable year will be deductible as an ordinary and necessary business expense.
Notice 2020-75 defines “Specified Income Tax Payment” 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 (Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation.”
The deduction will be allowed whether the imposition of the income tax is mandatory or the result of an election by the entity.
The “Specified Income Tax Payments” do not constitute an item of deduction that a partner or S corporation shareholder considers separately in applying the SALT deduction limitation as an individual.
The proposed regulations will apply to any Specified Income Tax Payments made on or after Nov. 9, 2020, and taxpayers will also be allowed to apply the rules to such payments made in a tax year ending after Dec. 31, 2017, and made before Nov. 9, 2020.
What states are impacted?
Connecticut imposed a mandatory income tax on pass-through entities for tax years starting on or after Jan. 1, 2018.
Other states providing elective versions of the Connecticut workaround are:
- Louisiana: Tax years beginning on or after Jan. 1, 2019
- Maryland: Effective July 1, 2020, for tax years beginning after Dec. 31, 2019
- New Jersey: Tax years beginning on or after Jan. 1, 2020
- Oklahoma: Tax years beginning on or after Jan. 1, 2019
- Rhode Island: Tax years beginning on or after Jan. 1, 2019
- Wisconsin: Tax years beginning on or after Jan. 1, 2018
Other states are likely to follow with additional SALT CAP workarounds based on this Treasury notice.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightImpacts of Wayfair and remote work on income tax nexusCorey Rosenthal, Arvinder Kaur, Jamie KellyFollowing the ruling in Wayfair and the increase in remote work, companies need to have a thorough understanding of state nexus rules and know how their business activities affect the establishment of nexus under those rules.
InsightTennessee Works Act signed by Governor LeeJohn Iannotti, Jason Gajramsingh, Marissa McClainThe Governor of Tennessee, Bill Lee, has signed the Tennessee Works Act into law and provides more than 400 million in tax savings. Learn more.
InsightNew York State’s 2023-24 budget adjusts PTE tax, various creditsArvinder Kaur, Corey L. RosenthalThe state’s new budget extends, expands, or otherwise adjusts various tax rates, definitions, and provisions. Read highlights.
InsightFlorida court: No homestead tax exemption on exclusively rented residenceFaith L. Gorman, Melissa MagerCan a homeowner receive the homestead exemption on a portion of their residence that is rented exclusively to a tenant? Read more.