The state and local tax deduction, commonly referred to as the SALT deduction, is a federal deduction that allows taxpayers that itemize their tax returns to deduct the amount paid in taxes to state or local governments from their federal return. SALT deductions can include the amounts paid on property and real estate taxes, personal property taxes, and either local income tax or sales tax.
Prior to the Tax Cuts and Jobs Act (“TCJA”), there was no limit on the amount a taxpayer may claim as a SALT deduction. The TCJA, however, limits the SALT deduction for individuals at $10,000 for the 2018-2025 tax years.
Some of the taxpayers hit hardest by this cap is the taxpayers that receive income from a pass through entity (PTE) such as a partnership or S corporation. To assist these taxpayers, the Oklahoma Legislature enacted the Pass-Through Entity Tax Equity Act of 2019 (the “Act”). The Act provided a work-around of the $10,000 SALT deduction limit by allowing a PTE to make an election to pay a tax on income that would otherwise be taxable to the owners of the PTE.
At the time of enactment, it was unclear whether the Internal Revenue Service (“IRS”) would take an adverse position to the Act. This question remained until the IRS issued Notice 2020-75 (the “Notice”), which agreed that a PTE may claim entity-level deductions for state income tax paid under state laws that shift the tax burden from the individual owners to the business entity.
The Notice provides Oklahoma businesses with much needed clarity on how the IRS may view the election provided by the Act. If you would like to discuss whether your entity would benefit from the election provided by the Act contact us today.
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