Guidance Issued for Partnerships, S Corps on SALT Deduction Limit

Guidance Issued for Partnerships, S Corps on SALT Deduction Limit

Internal Revenue Service

The IRS has announced (Notice 2020-75) its intent to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the tax year of payment. <a href="/research/federal/usc26/164#cq6x-0000041" resolve="/lr/resolve//cq6x#cq6x-0000041">Section 164(b)(6)</a> limits an individual’s SALT deduction for tax years beginning after December 31, 2017, and before January 1, 2026. The limitation does not apply to taxes described in <a href="/research/federal/usc26/164#cq6x-0000005" resolve="/lr/resolve//cq6x#cq6x-0000005">section 164(a)(3)</a> that are imposed by a foreign country or to any taxes described in <a href="/research/federal/usc26/164#cq6x-0000003" resolve="/lr/resolve//cq6x#cq6x-0000003">section 164(a)(1)</a> and <a href="/research/federal/usc26/164#cq6x-0000004" resolve="/lr/resolve//cq6x#cq6x-0000004">(2)</a> that are paid and incurred in carrying on a trade or business or an activity described in <a href="/research/federal/usc26/212" resolve="/lr/resolve//cph8">section 212</a>. Some jurisdictions described in <a href="/research/federal/usc26/164#cq6x-0000011" resolve="/lr/resolve//cq6x#cq6x-0000011">section 164(b)(2)</a> have enacted, or are contemplating the enactment of, workaround 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. In some cases, the jurisdiction’s tax law provides a corresponding or offsetting, owner-level tax benefit, such as a credit, deduction, or exclusion. Treasury and the IRS are aware that there is uncertainty as to whether entity-level payments made under those laws to jurisdictions described in <a href="/research/federal/usc26/164#cq6x-0000011" resolve="/lr/resolve//cq6x#cq6x-0000011">section 164(b)(2)</a> other than U.S. territories must be taken into account in applying the SALT deduction limitation at the owner level. The proposed regs will provide certainty to individual owners of partnerships and S corporations in calculating their SALT deduction limitations. Based on the statutory and administrative authorities described in the guidance, the forthcoming regs will clarify that specified income tax payments (as defined in the guidance) are deductible by partnerships and S corporations in computing their non-separately stated income or loss. The proposed regs described in the guidance apply to specified income tax payments made after November 8, 2020. The regs will also allow applicable taxpayers to apply the rules described in the guidance to specified income tax payments made in a tax year of the partnership or S corporation ending after December 31, 2017, and made before November 9, 2020, if a specified condition is met.

The IRS has announced (Notice 2020-75) its intent to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the tax year of payment.

The IRS has announced (Notice 2020-75) its intent to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the tax year of payment. Section 164(b)(6) limits an individual’s SALT deduction for tax years beginning after December 31, 2017, and before January 1, 2026. The limitation does not apply to taxes described in section 164(a)(3) that are imposed by a foreign country or to any taxes described in section 164(a)(1) and (2) that are paid and incurred in carrying on a trade or business or an activity described in section 212. Some jurisdictions described in section 164(b)(2) have enacted, or are contemplating the enactment of, workaround 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. In some cases, the jurisdiction’s tax law provides a corresponding or offsetting, owner-level tax benefit, such as a credit, deduction, or exclusion. Treasury and the IRS are aware that there is uncertainty as to whether entity-level payments made under those 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. The proposed regs will provide certainty to individual owners of partnerships and S corporations in calculating their SALT deduction limitations. Based on the statutory and administrative authorities described in the guidance, the forthcoming regs will clarify that specified income tax payments (as defined in the guidance) are deductible by partnerships and S corporations in computing their non-separately stated income or loss. The proposed regs described in the guidance apply to specified income tax payments made after November 8, 2020. The regs will also allow applicable taxpayers to apply the rules described in the guidance to specified income tax payments made in a tax year of the partnership or S corporation ending after December 31, 2017, and made before November 9, 2020, if a specified condition is met.

Sec. 164 Taxes

Sec. 703 Partnership computations

Sec. 702 Income and credits of partner

Search Connectors

Proximity Search:

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

Guidance Issued for Partnerships, S Corps on SALT Deduction Limit