Page 582 - TaxAdviser_2022

STATE & LOCAL TAXES

Regs. Sec. 1.170A-1(h)(3), proposed owners prior to the TCJA’s $10,000 each state to create its own eligibility
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in August 2018 and finalized in June SALT limitation. requirements and election procedures
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2019. Under Notice 2020-75, an SITP has made this workaround extremely
With the IRS aggressively targeting was defined as any amount paid by a complex. While everyone may be
attempts to create a SALT cap work- partnership or S corporation to a state, focusing on the state intricacies, a
around and with no changes to the political subdivision of a state, or the variety of unanswered questions remain
limitation coming from the courts or District of Columbia to satisfy its li- regarding the impact of SITPs on the
Congress, it seemed increasingly likely ability for income taxes imposed by the calculation of federal taxable income.
that taxpayers would have to wait until domestic jurisdiction. The imposition Even though the notice was issued in
after 2025, when the SALT cap is set of the state income tax can be a result November 2020, the proposed regula-
to expire, to receive a federal deduction of an election. In addition, PTE own- tions are still not published, forcing tax
related to state income taxes paid due ers can receive a partial or full state advisers to navigate through the notice
to passthrough activity. However, one deduction, exclusion, credit, or other and develop positions based on the
workaround seemed to gain legitimacy tax benefit that is based on their share limited guidance provided.
with the IRS and opened the door for of the amount paid by the partnership
PTEs to claim a SALT deduction. or S corporation. Do SITPs have to be related
In November 2020 the IRS released The IRS’s notice provided comfort to a trade or business to allow
Notice 2020-75, which provided for a variety of states to finalize legisla- a federal deduction?
that proposed regulations would be tion allowing state income taxes to The language in the notice suggests
forthcoming, while also clarifying be paid by the PTE, while providing that SITPs do not need to be related
that SALT imposed on and paid by a a federal deduction for the amount to a trade or business to give rise to a
partnership or S corporation, referred paid. As of May 2022, 27 states and federal deduction. However, some states
to as specified income tax payments one locality had enacted legislation do require the PTE activities to be as-
(SITPs), would be allowed as a deduc- allowing passthrough entities to make sociated with a trade or business for the
tion by the partnership or S corpora- SITPs and receive a federal income PTE to pay an SITP to the state.
tion in computing its non–separately tax deduction. The notice defines an SITP as any
stated federal taxable income or loss While the notice provided an out- amount paid by a PTE to satisfy its
for the tax year of payment. The notice line of what was required of states for liability for income taxes imposed by
allowed partners and S corporation their PTE taxes to qualify as a federal a domestic jurisdiction. Specifically,
shareholders to receive a federal deduc- deduction, the legislation across the the notice defines an SITP to solely
tion for SITPs, resulting in a benefit states is not unified. As many tax ad- include “income taxes described in sec-
similar to what was provided to PTE visers have experienced, the ability of tion 164(b)(2) for which a deduction by

7. REG-112176-18. 8. T.D. 9864.

EXECUTIVE SUMMARY may deduct SALT imposed on the federal taxation of specified
them. income tax payments (SITPs),
• The law known as the Tax Cuts including whether SITPs must
and Jobs Act, P.L. 115-97, • In response, many states have be related to a trade or business
imposed a $10,000 limitation on enacted laws allowing PTEs to to be deductible, whether
individuals’ deduction of state elect to pay SALT at the entity accrued SITPs are deductible,
and local taxes (SALT) for tax level as a PTE tax. However, whether SITPs are deductible
years 2018 through 2025. each state’s PTE regime is in calculating adjusted gross
different. income, how a federal deduction
• In Notice 2020-75, the IRS for SITPs should be allocated
announced forthcoming • The differences in state laws among entity owners, and
regulations under which and the ambiguities in Notice whether a state income tax
partnerships and S corporations 2020-75 result in a number of refund for an SITP is includible in
(passthrough entities, or PTEs) unresolved issues regarding income.

40 November 2022 The Tax Adviser