When the Tax Cuts and Jobs Act was enacted in 2017, the $10,000 cap on state and local taxes deductions left residents in high tax states out in the cold. For example, many New Yorkers and Californians know it is not unusual for state income tax amounts to approach the cap from payroll deductions alone. Add in property taxes and many are no longer able to offset the high cost of living at tax time.
Since the enactment, various states have been looking to provide a workaround to residents without much success – until now.
On November 9, 2020, the IRS released Notice 2020-75. This notice announced that business owners can now benefit from state and local taxes imposed, paid, and deducted at the S corporation or partnership – including LLCs – level without having to worry about the SALT deduction cap.
To illustrate, let’s say you are a McDonald’s owner/operator with an organization in Connecticut. Your business files taxes in Connecticut and gives you a CT K-1. If the business owed taxes, you should expect to see your portion of the tax reported on your K-1. Under the new rules, you would benefit on your personal return from the taxes paid at the entity level without having to limit the amount of property tax you can deduct for your Stamford, Conn., home. The same would be true if you lived in Westchester County, N.Y. (in other words, a non-resident of Connecticut).
Connecticut is not the only state that has entity-level taxes for pass-through entities. Louisiana, New Jersey, Oklahoma, Rhode Island and Wisconsin also have an entity-level tax on passthrough entities.
We will continue to monitor developments from the IRS and the state. For additional information, you can find Notice 2020-75 here: https://www.irs.gov/pub/irs-drop/n-20-75.pdf.
Lawron DeLisser, CPA, is a Senior with our Business & Tax Advisory Group. She can be reached at firstname.lastname@example.org.