Treasury, IRS Allow Pass-throughs to Avoid Cap on SALT Deductions

  

Jessica L. Jeane, J.D.
Director of Public Policy & Communications
November 10, 2020

Treasury and the IRS intend to issue proposed regulations clarifying that pass-through entities can avoid the cap on state and local income tax (SALT) deductions.

Notice 2020-75

The forthcoming proposed rules will clarify that state and local income taxes imposed on and paid by a partnership or S corporation on its income are allowed as a deduction by the pass-through entity in computing its non-separately stated taxable income or loss for the taxable year of payment, according to Notice 2020-75 issued on November 9.

Thus, partners and shareholders who itemize deductions are not subject to the SALT deduction limitation of $10,000 ($5,000 for a married individual filing a separate return) enacted under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97). The TCJA’s SALT deduction limitation applies to taxable years beginning after December 31, 2017, and before January 1, 2026.

“Treasury and the IRS are taking the necessary steps to provide fairness for America’s small businesses,” Treasury Secretary Steven Mnuchin said in a November 9 statement. "These proposed regulations will offer clarity for individual owners of pass-through entities."

State Workarounds

Treasury and the IRS allude in the notice to certain high-tax states’ “workarounds” implemented in regard to the controversial SALT cap. “Certain jurisdictions described in section 164(b)(2) have enacted, or are contemplating the enactment of, tax laws that impose either a mandatory or elective entity-level income tax on partnerships and S corporations that do business in the jurisdiction or have income derived from or connected with sources within the jurisdiction,” the IRS states. In certain instances, the jurisdiction’s tax law provides a corresponding or offsetting, owner-level tax benefit, such as a full or partial credit, deduction, or exclusion. The Treasury Department and the IRS are aware that there is uncertainty as to whether entity-level payments made under these laws to jurisdictions described in section 164(b)(2) other than U.S. territories must be taken into account in applying the SALT deduction limitation at the owner level.”

Notably, the proposed rules will apply to specified income tax payments starting on November 9, 2020, and will allow taxpayers to apply these rules to specified income tax payments made in a taxable year of a partnership or an S corporation ending after Dec. 31, 2017, and before the date the forthcoming proposed regulations are published in the Federal Register. “Prior to the issuance of the proposed regulations, taxpayers may rely on the provisions of this notice with respect to Specified Income Tax Payments,” the IRS states.

 

NSA presents this information in the interest of its members for information purposes only and is not intended to provide, nor should it be relied upon, as legal, tax, or accounting advice.

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