The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have issued Notice 2020-75 to alert taxpayers on the rules they plan to include in upcoming proposed regulations. Among the items included, the IRS will clarify that “Specified Income Tax Payments,” which means state and local income taxes paid by a partnership or S corporation, are allowed as a deduction by the entity in computing its non-separately stated taxable income or loss in the tax year the payment was made. This is a shift from current regulations indicating these taxes must be separately stated on shareholder K-1s.
Shareholder and Partner Tax Returns
The Tax Cuts and Jobs Act limits an individual’s State and Local Income Tax (SALT) deduction to $10,000. With the upcoming shift for income tax payments made by a partnership or S Corporation up into non-separately stated taxable income, the income taxes paid will no longer be considered when applying the State and Local Income Tax (SALT) deduction limitation to any individual partner or shareholder on their own tax return. This change could increase the overall state tax deductions recognized for some individuals.
Tax Years Impacted
The IRS indicates these proposed regulations will apply to state and local income tax payments made on or after November 9, 2020. However, the proposed regulations will also allow taxpayers to apply the rules to payments made in a taxable year ending after December 31, 2017.
What to Do Next
Taxpayers should be on the lookout for proposed regulations to be issued by the IRS and Treasury Department. While no action is required at this time, taxpayers should be aware of the change in presentation and potential tax benefits that could arise on their 2020 tax returns as a result of future proposed regulations.
Please contact us for additional consultation or for any other issues related to tax law changes. We’re glad to assist you and discuss what this potential change could have on your business or shareholder K-1s.