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Mar 22, 2022

At the end of 2017, the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 delivered the $10,000 state and local tax (SALT) deduction limitation. Before passage of TCJA, individuals who itemized deductions could deduct their state tax payments in full using Schedule A, Itemized Deductions, of their federal Form 1040, U.S. Individual Income Tax Return. Now that the amount of the deduction is limited, shifting the income taxes directly to the passthrough entity swings the deduction upstream.

In theory, a basic workaround seems simple. However, the varying mechanics of how each state’s workaround actually works has created complexities for taxpayers and practitioners.

On this episode of the Tax Section Odyssey, Alexander Scott, JD, LLM Senior Manager — AICPA Tax Policy & Advocacy, and Annette Nellen, CPA, CGMA, Esq., Tax Professor — MST Program at San Jose State University, and a past Chair of the AICPA Tax Executive Committee, join April Walker, CPA, CGMA, Lead Manager — AICPA Tax Section, to examine the current state of various passthrough entity (PTE) tax workaround regimes.

What you’ll learn in this episode

  • Overview of the passthrough entity (PTE) tax  (1.07)
  • Items to keep in mind that vary among states (2.23)
  • Highlights of the Notice 2020-75 published in 2020 (4.05)
  • Considerations for tax practitioners when working with clients (7.42)
  • Terminology considerations, including “specified income tax payments” and “nonseparately stated taxable income or loss” (8.55)
  • Additional considerations to keep in mind for compliance purposes, including what personnel within a client’s business you’re interacting with (10.55)
  • Similarity to second class of stock complications (12.26)
  • Form presentation and partnership agreement modifications (15.35)
  • Timing sensitivities and mechanic issues (17.15)
  • Final thoughts (21.42)

AICPA resources

 Other resources

  • Notice 2020-75 — The IRS clarified in 2020 that partnerships and S corporations may deduct their state and local tax (SALT) payments at the entity level in computing their nonseparately stated taxable income or loss. In addition, the notice announced that the Department of the Treasury and the IRS intend to issue proposed regulations of the same.

Keep your finger on the pulse of the dynamic and evolving tax landscape with insights from tax thought leaders in the AICPA Tax Section. The Tax Section Odyssey podcast includes a digest of tax developments, trending issues and practice management tips that you need to be aware of to elevate your professional development and your firm practices.

This resource is part of the robust tax resource library available from the AICPA Tax Section. The Tax Section is your go-to home base for staying up to date on the latest tax developments and providing the edge you need for upskilling your professional development. If you’re not already a member, consider joining this prestigious community of your tax peers. You’ll get free CPE, access to rich technical content such as our Annual Tax Compliance Kit, a weekly member newsletter and a digital subscription to The Tax Adviser.