State implications with the PTE tax

At the end of 2017, the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 delivered the $10,000 state and local tax (SALT) deduction limitation. Before passage of TCJA, individuals who itemized deductions could deduct their state tax payments in full using Schedule A, Itemized Deductions, of their federal Form 1040, U.S. Individual Income Tax Return. Now that the amount of the deduction is limited, shifting the income taxes directly to the passthrough entity swings the deduction upstream.

In theory, a basic workaround seems simple. However, the varying mechanics of how each state’s workaround actually works has created complexities for taxpayers and practitioners.

On this episode of the Tax Section Odyssey, Alexander Scott, JD, LLM Senior Manager — AICPA Tax Policy & Advocacy, and Annette Nellen, CPA, CGMA, Esq., Tax Professor — MST Program at San Jose State University, and a past Chair of the AICPA Tax Executive Committee, join April Walker, CPA, CGMA, Lead Manager — AICPA Tax Section, to examine the current state of various passthrough entity (PTE) tax workaround regimes.

What you’ll learn in this episode

• Overview of the passthrough entity (PTE) tax  (1.07)
• Items to keep in mind that vary among states (2.23)
• Highlights of the Notice 2020-75 published in 2020 (4.05)
• Considerations for tax practitioners when working with clients (7.42)
• Terminology considerations, including “specified income tax payments” and “nonseparately stated taxable income or loss” (8.55)
• Additional considerations to keep in mind for compliance purposes, including what personnel within a client’s business you’re interacting with (10.55)
• Similarity to second class of stock complications (12.26)
• Form presentation and partnership agreement modifications (15.35)
• Timing sensitivities and mechanic issues (17.15)
• Final thoughts (21.42)

AICPA resources

• SALT Roadmap — State and Local Tax Guide — Navigate the complex world of state and local taxes with an animated map compiling basic state information and quick links to state's forms and instructions, government websites and CPA society information.
• State and Local Tax Advocacy Resources — Information on state-level advocacy issues featuring the AICPA position paper on state PTE tax implementation issues.
• States with adopted or proposed PTE tax — This map demonstrates state activity regarding PTE tax.
• The Tax Adviser —a collated list of the latest articles on the SALT cap deduction.

 Other resources

• Notice 2020-75 — The IRS clarified in 2020 that partnerships and S corporations may deduct their state and local tax (SALT) payments at the entity level in computing their nonseparately stated taxable income or loss. In addition, the notice announced that the Department of the Treasury and the IRS intend to issue proposed regulations of the same.

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