On November 9, 2020, the IRS released Notice 2020-75 noting that it intends to issue proposed regulations that will provide clarity on the deductibility of certain workarounds for the $10,000 cap on state and local taxes (SALT), imposed on individuals as part of the Tax Cuts and Jobs Act. This notice may impact partners in partnerships and shareholders of S corporations that source income to certain states that have put measures in place to assist them with receiving a deduction for taxes paid by the entity on the state source income.
IRS Notice 2020-75 approves previously created state-level SALT cap workarounds by noting that forthcoming proposed regulations will clarify that Specified Income Tax Payments completed by a partnership or S corporation are deductible by these entities in computing their non-separately stated income or loss. These payments are not accounted for when applying the SALT deduction cap to the partners and shareholders of these pass-through entities.
Existing SALT Cap workarounds that have been put into place include Connecticut’s Pass-Through Entity Tax and New Jersey’s Business Alternative Income Tax (BAIT), in addition to a handful of other states.
The proposed regulations described in the Notice will go into effect as of November 9, 2020 for Specified Income Tax Payments made on or after this date. These proposed regulations will also allow taxpayers to apply the rules described in the notice to Specified Income Tax Payments made by partnerships and S corporations in taxable years ending after December 31, 2017 and prior to November 9, 2020.
With the issuance of this guidance, more states may pass similar entity-level taxes to allow partners and shareholders of pass-through businesses to benefit.
To discuss how IRS Notice 2020-75 might impact SALT cap workarounds that may work for your specific partnership or S corporation, contact your Untracht Early advisor.