The Treasury Department and IRS on Monday, November 9, 2020, gave their blessing to
a type of state workaround to the $10,000 cap on the state and local tax (SALT) deduction implemented under President Trump’s 2017 Tax Cuts & Jobs Act.
The guidance could help some business owners get around the cap, which has been among the most controversial provisions in the law.
The IRS intends to issue proposed regulations clarifying that state and local income taxes imposed on and paid by a partnership or an S corporation, defined as a "specified income tax payment," are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.
Notice 2020-75 defines a "specified income tax payment" as any amount paid by a partnership or an S corporation to a state, political subdivision of a state, or the District of Columbia to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation.
Furthermore, the notice clarifies that payment is deductible regardless to whether the imposition of and liability for the income tax is the result of an election by the entity.
Finally, Notice 2020-75 confirms that any specified income tax payment made by a partnership or an S corporation is not taken into account in applying the $10,000 SALT cap on a taxpayer's individual income tax return
Impact to Rhode Island Pass-through Entities
For tax years beginning on or after January 1, 2019, a Rhode Island pass-through entity may elect, on an annual basis, to pay their Rhode Island tax on net business income at the entity level at a rate of 5.99%.
The owner(s) of the pass-through entity would still report their share of the net business income on their tax return, including an additional modification equal to the tax, but they would receive a credit for their proportionate share of the amount of tax paid by the pass-through entity.
Next Steps We will provide an update as soon as the IRS releases the proposed regulations. If you have any questions or would like to discuss how this impacts you or your business, we encourage you to reach out to one of our tax specialists at Restivo Monacelli LLP.