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Impact of IRS Notice 2020-75 on $10,000 State Limitation

Roy Tegenkamp

December 04, 2020

In November, the IRS released Notice 2020-75 in which the government holds it will allow pass-through entities to fully deduct entity level income tax payments, provided certain requirements are met. The deduction for individuals is currently limited to $10,000. This notice would allow pass through entities such as S-corps and partnerships to pay the taxes and take a full deduction, therefore indirectly giving owners a full deduction.

The notice states the government intends to issue proposed regulations to clarify that state and local income taxes imposed on, and paid by a flow through entity, such as 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 taxable year of payment.

Only a “Specified Income Tax Payment” is deductible, defined as “any amount paid by a partnership or an S corporation to a state, a 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.”

States must pass specific statute providing for pass-through entity level taxation for this notice to apply. As of now, few states have passed statutes that would allow a pass-through entity to pay income taxes at the entity level. Merely allowing a pass-through entity to make withholding tax payments on behalf of owners will not qualify because those withholding tax payments are treated as payments made by the owners, and not as payments in satisfaction of the pass-through entity’s tax liability.

We will continue to monitor the states and will provide updates as they are released. Please contact our team or your dedicated Mueller Prost advisor with any questions.

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