Notice 2020-75: The IRS Intends to Issue Proposed Regulations to Assist with State and Local Tax (SALT) Deduction Cap

On November 9, 2020, the IRS released Notice 2020-75. With this Notice, the IRS described its intention to issue proposed regulations, in connection with the Treasury Department, which would allow a partnership or an S-corporation for tax purposes to deduct state and local taxes from their non-separately stated taxable income or loss for the tax year of payments. They would not be passed through to the partners or shareholders, where they would then be subject to the Tax Cuts and Jobs Act’s $10,000.00 limitation on state and local tax (“SALT”) deductions.

Internal Revenue Code Section 164(a) provides for the SALT deduction. The SALT cap was provided for by Section 164(b)(6). In response to the Tax Cuts and Jobs Act’s so-called “SALT cap,” many states, including Connecticut, Maryland, New Jersey, Oklahoma, Rhode Island, Wisconsin, and Louisiana, adopted laws which separately attempted to circumvent the “SALT cap” on the state level. For example, in Louisiana, Oklahoma, and Wisconsin, the solution involved entities calculating their tax base and paying state income tax; the partners and shareholders were not assessed a tax liability and were not assessed a distributive share of income for state income tax purposes.

The remaining states mentioned above took a different approach to circumvent the “SALT cap”, the work-around involved the entity paying state income tax, but retaining certain pass-through features; partners and shareholders would then receive a state income tax credit equal to all or a portion of their share of the tax paid by the entity (as an aside, of the states listed, only Connecticut’s entity taxation regime is mandatory).

With the issuance of Notice 2020-75, the IRS has effectively expressed its intent to approve these state-level work-arounds. The intention of the IRS was unclear up until this point, as it had previously shut down SALT deduction work-arounds involving contributions to a charitable state fund via proposed regulations.

In Notice 2020-75, the IRS has confirmed its intention to issue proposed regulations clarifying that state and local income taxes imposed on and paid by partnerships and S-corporations will be allowed to be deducted by the entities themselves. The Notice says that these taxes must be direct income taxes imposed and paid by the entity, and defines them as Specified Income Tax Payments. The Notice further indicates that the proposed regulations will allow an entity a deduction regardless of their state’s regime, be it mandatory or elective.

Additionally, the Notice states that an entity tax does not constitute an item of deduction if a partner or S-corporation shareholder takes into account the partner’s distribution share separately under Sections 702 or 1363. Specified Income Tax Payments, as they are defined by the Notice, also exclude deductions which would be disallowed by IRC Sections 703(a)(2)(B) (Partnerships) or 1363(b)(2) (S-corporations).

Whether the final regulations will be promulgated has yet to be seen. Additionally, there is concern among lawmakers that this arrangement will allow partners in a partnership or shareholders in an S-corporation to be treated more favorably than workers who earn their income through wages, as wage-earners cannot form an LLC and become sub-contractors in order to avail themselves of the deduction. Only S-corporations, partnerships, and LLCs treated as partnerships for tax purposes may take advantage of the proposed changes described by the Notice.

The proposed regulations are intended to apply to tax payments made by an entity on or after November 9, 2020, and Taxpayers may apply the rules in the Notice to Specified Income Tax Payments made in a taxable year of their entity ending after December 31, 2017. If you are a business owner, or are considering forming a business, and have any questions or concerns as to how this new Notice may affect your business taxes, you should not hesitate to reach out to our law firm’s tax professionals for a consultation or further explanation.

VW Contributor: Elena K. Whidden
© 2020 Vandenack Weaver LLC
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New Nebraska Law’s Impact on Filing Requirements for Corporations and Partnerships

LB 512 signed into law on May 30th, 2019, requires all S Corporations, limited liability companies, and partnerships with Nebraska source income to file a Nebraska return for all tax years beginning on or after January 1st, 2019.

Previously, S Corps, LLCs, and partnerships had to file a Nebraska income tax return if they had nonresident owners and were apportioning income.

The Nebraska Department of Revenue (DOR) encourages all S corporations, limited liability companies, and partnerships to e-file their pass-through entity returns. A Nebraska state ID is required when e-filing a pass though entity return.

A pass-through entity without an assigned Nebraska identification number will need to apply for a number before e-filing a 2019 Nebraska tax return. If your business does not have a Nebraska Tax ID Number, follow the link below to the Nebraska Department of Revenue to register your business.

© 2019 Vandenack Weaver LLC

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Revised Tax Return Due Dates for Partnerships and C Corporations

President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“Act”) into law on July 31, 2015. The Act includes a series of revised tax return filing deadlines for partnerships and C corporations.

Returns for partnerships and entities taxed as a partnership filing a Form 1065 are due March 15 or the 15th day of the third month following the end of the organization’s fiscal year. The previous due date was April 15. Extensions are available for up to six months.

Returns for C corporations and entities taxed as a C corporation filing a Form 1120 are due April 15 or the 15th day of the fourth month following the end of the organization’s fiscal year. The previous due date was March 15. Returns for C corporations with a fiscal year ending on June 30 are due on September 15 until 2025. After 2025, the returns are due on October 15. Most C corporations can receive extensions of up to five months until 2026. After 2026, all C corporations can receive extensions for up to six months.

Tax returns for S corporations remain unchanged and are due on Mach 15 or the 15th day of the third month after the end of the organization’s fiscal year.

The new dates are effective for tax years beginning after December 31, 2015. These changes are not applicable to most filers until tax returns for 2016 are due in 2017, excluding short year filings.

© 2016 Vandenack Williams LLC
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