Not a accomplice / S-Corp shareholder SALT company tax deduction restrict | McGlinchey Stafford

The Internal Revenue Service has announced that it will issue proposed regulations that will clarify that certain state or local income taxes levied and paid by a partnership and / or S company do not exceed the US $ 10,000 limit for state and local taxes subject. Especially in Note 2020-75The IRS announced that it intends to enact a proposal for a regulation to clarify that state and local income taxes imposed on and paid by a partnership or S company will be deducted from the partnership or S company at the Calculation of taxable income that is not shown separately or loss for the taxable payment year is permitted.

The Tax Reduction and Employment Act (Public Law 115-97, 131 Stat. 2054 (December 22, 2017)) added IRC Section 164 (b) (6), which allows a person to be deducted under IRC Section 164 (a) (the SALT deduction) is capped) for tax years beginning after 2017 and before 2026 to $ 10,000 ($ 5,000 in the case of a married individual filing a separate tax return) for the total of the following state and local taxes incurred during the Calendar year were paid:

• property taxes;
• personal wealth taxes;
• Income, war profits and profit taxes; and
• general sales taxes.

The 2020-75 Communication and the forthcoming proposed regulations are in line with the intent of Congress as set out in the Congressional Conference Report on the Tax Reduction and Employment Act. In enacting IRC Section 164 (b) (6), Congress noted in the conference report that “corporate-level taxes such as B. a business tax levied on transit companies is reflected in the dividend of a partner of a partner or an S company, or a pro-rata portion of the income or loss on a schedule K-1 (or similar form) becomes the distributive or pro-rata Further reduce the partner or shareholder’s share of income as under applicable law. “HR Rep. No. 115-466, at 260 n.172 (2017).

To potentially avoid the restrictions on SALT withholding, certain U.S. jurisdictions have enacted tax laws or are considering introducing tax laws that would impose either mandatory or elective corporate income tax on partnerships and S-companies in the company Jurisdiction or income from sources within or in connection with the jurisdiction. (In general, partnerships and S-corporations are not subject to state and local income tax, but partners and S-corporation shareholders are subject to tax.) In certain cases, the tax law of the jurisdiction provides for a corresponding or opposing tax advantage at the owner level, e.g. a full or partial credit , a deduction or an exclusion. For example, if a partnership with two equal partners pays $ 30,000 state income tax, the jurisdiction may allow each partner to collect a $ 15,000 credit on their personal income tax liability owed to that jurisdiction. In the example above, the question arises whether the $ 15,000 income tax credit that each partner receives is subject to the SALT withholding restriction.

The forthcoming proposed regulations will provide clarity by introducing the concept of “specified income tax payments” and assuming that specified income tax payments by partnerships and S-companies are deductible when calculating their undisclosed income or loss. A specified income tax payment made by a partnership or S corporation during a tax year does not constitute a deduction that a partner or S corporation shareholder considers separately when determining the partner or S corporation shareholder’s own income tax liability for the tax year. Instead, the stated income tax payments are shown in the distributing or pro-rata portion of a partner or an S-Shareholder in income or losses not shown separately, which are shown in Appendix K-1 (or a similar form). As a result of the unspecified treatment, the established income tax payment is not treated as flowing and paid by the partner or shareholder, although that partner or shareholder may receive full or partial payment in their personal tax return, in part credit, deduction or exclusion for their “share” of the tax. If the partner or shareholder is not treated as a taxpayer, the SALT deduction limit does not apply.

The term “Specified Income Tax Payment” means any amount that a partnership or sub-company has paid to a state, political division, or the District of Columbia (domestic jurisdiction) in order to meet its liability for domestic income tax in jurisdiction the partnership or the S company. For this purpose, a fixed income tax payment includes any amount that a partnership or S company pays to a domestic jurisdiction under a direct collection of income tax by the domestic jurisdiction on the partnership or S company. It does not matter (1) whether the income tax imposition and liability is the result of a choice by the company, or (2) whether the partners or shareholders receive a partial or full deduction, foreclosure, credit or other tax benefit that (a) is based on their share of the amount the partnership or S-company paid to meet their income tax liability under the tax law of the domestic jurisdiction, and (b) reduces the individual income tax liabilities of the partners or shareholders under the domestic tax law of the jurisdiction.

The proposed rules apply to specified income tax payments made on or after November 9, 2020. The proposed rules also allow taxpayers to apply the rules described in Notice 2020-75 to specified income tax payments made in a taxable year of partnership or S corporation ends after December 31, 2017 and occurs before December 9, 2017. November 2020, provided the specified income tax payment is made to cover the income tax liability imposed on the partnership or S-corporation under a law enacted before November 9th. 2020. Until the proposed regulations are published, taxpayers may refer to the 2020-75 Notice for certain income tax payments.