Federal implications of passthrough entity tax elections

February 6, 2023

By Lynn Mucenski-Keck, CPA, and Jeremias Ramos, CPA - originally written Dec 1, 2022


• The law known as the Tax Cuts and Jobs Act, P.L. 115-97, imposed a $10,000 limitation on individuals’ deduction of state and local taxes (SALT) for tax years 2018 through 2025.

• In Notice 2020-75, the IRS announced forthcoming regulations under which partnerships and S corporations (passthrough entities, or PTEs) may deduct SALT imposed on them.

• In response, many states have enacted laws allowing PTEs to elect to pay SALT at the entity level as a PTE tax. However, each state’s PTE regime is different.

• The differences in state laws and the ambiguities in Notice 2020-75 result in a number of unresolved issues regarding the federal taxation of specified income tax payments (SITPs), including whether SITPs must be related to a trade or business to be deductible, whether accrued SITPs are deductible, whether SITPs are deductible in calculating adjusted gross income, how a federal deduction for SITPs should be allocated among entity owners, and whether a state income tax refund for an SITP is includible in income.

It has been two years since the IRS stated in Notice 2020-75 that it intended to issue regulations regarding the deductibility of certain state and local income tax payments imposed on passthrough entities (PTEs). However, as of this writing, no such regulations have been issued. Tax practitioners have gone through another tax season without substantive guidance answering critical questions regarding the interaction between PTE taxes and numerous federal tax provisions. In the absence of IRS regulations, tax practitioners are responsible for formulating positions that Notice 2020-75 did not provide.

Continue reading the entire article here. There is A LOT OF VALUABLE INFORMATION in the full article.  In case updates are made, we've only included the executive summary in this post. 

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