Jan 25, 2023
The Tax Cuts and Jobs Act (TCJA), P.L. 115-97, imposed a $10,000 limitation on individual taxpayers for the deduction of state and local taxes (SALT) for tax years 2018 through 2025. In response, many states enacted laws allowing (or mandating) passthrough entities (PTEs) to pay the taxes at the entity level instead.
In November of 2020, the IRS issued Notice 2020-75, which clarified that partnerships and S corporations may deduct their SALT payments at the entity level in computing nonseparately stated taxable income or loss. The notice also indicated that the IRS intends to issue proposed regulations to this effect.
While electing a PTE tax election can be very beneficial overall, certain aftereffects — while small alone — when stacked together, may reach a materiality level where it should be second-guessed.
On this Tax Section Odyssey episode, David Kirk, CPA, CFP, LLM, Private Tax Leader, National Tax — EY, discusses with April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA, several concerns that could lead to reconsideration of making a PTE election.
What you’ll learn in this episode
- S corporation issues (3.08)
- State crediting complications (11.54)
- State governments sharing in a “piece of the pie” (14.24)
- Alternative minimum tax (AMT) matters (16.11)
- Grantor trusts considerations (20.10)
- Non-grantor trusts concerns (22.48)
- Thoughts on refunds (25.00)
- Final thoughts (28.29)
Related resources
- SALT Roadmap — State and Local Tax Guide — Navigate the complex world of state and local taxes with a compilation of information and quick links to additional guidance and references. Use the map to access information on the types of state and local taxes imposed, tax rates, nexus, passthrough entity (PTE) tax elections and mandates, due dates, government websites and CPA society information. Also quickly determine commonly used state and local tax forms and easily locate versions and their instructions.
- State and Local Tax Advocacy Resources — This page provides information and documents created by the AICPA State and Local Tax Technical Resource Panel (SALT TRP) on state-level tax advocacy issues affecting tax professionals.
- State implications with the PTE tax | Tax Section Odyssey — States continue to look at the PTE tax to sidestep the federal $10,000 SALT cap deduction limitation following the IRS’s Notice 2020-75.
- Questions to consider before electing into a PTE tax, The Tax Adviser, Sept. 1, 2022.
- Map of states with adopted or proposed PTE level tax — AICPA downloadable map open to everyone.
- Links to PTE taxes states' legislation and tax authorities' information and guidance — AICPA downloadable document open to everyone.
- Taxpayer and practitioner considerations for whether to elect into a state PTE tax — AICPA downloadable document open to everyone.
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