Page 583 - TaxAdviser_2022

While the notice provided an outline of what was required of states for
their PTE taxes to qualify as a federal deduction, the legislation across
the states is not unified.

a partnership is not disallowed under from miscellaneous itemized deduc- and local income taxes that are paid
section 703(a)(2)(B), and such income tions under Sec. 67(b)(2). or accrued.
taxes for which a deduction by an S Based on the notice identifying Under the accrual method of account-
corporation is not disallowed under SITPs as Sec. 164 deductions, PTEs not ing, a liability is incurred and generally is
section 1363(b)(2).” Nothing within involved in trade or business activities deducted for federal income tax purposes
Sec. 164 limits the federal deduction could be allowed a federal deduction for in the tax year in which:
for SALT to those attributable to a SITPs with no miscellaneous itemized ■ All the events have occurred that es-
trade or business or an investment deduction limitation. This could lead to tablish the fact of the liability;
activity. Instead, it provides a federal practices where PTEs are created solely ■ The amount of the liability can be
deduction for individuals, investment to benefit from a federal deduction re- determined with reasonable accu-
activities, and businesses alike. lated to the SITP. racy; and
SITPs are deemed a Sec. 164 de- ■ Economic performance has occurred
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duction and not a Sec. 212 expense, Are accrued with respect to the liability.
i.e., an expense associated with the SITPs deductible? Economic performance for tax liabili-
production of income. The provisions Uncertainty surrounds whether an ties generally occurs at the time the tax is
of Sec. 212 were not intended in any SITP must be paid by year end or paid. However, an exception is provided
way to disallow expenses that would merely accrued for a PTE to receive a for tax liabilities if:
otherwise be allowable but instead were federal deduction. Based on the ambig- ■ Economic performance with respect
enacted to allow for additional itemized uous language in the notice, a position to the liability occurs on or before the
deductions that wouldn’t otherwise could be taken that, for accrual-based earlier of the date the taxpayer files a
be allowable as a trade or business ex- taxpayers, a tax liability either paid or timely (including extensions) return
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pense. This is clearly reflected when an accrued by year end can give rise to a for that tax year or Sept. 15 of the fol-
individual receiving investment income federal tax deduction. lowing tax year;
would claim a federal SALT itemized Section 3.02 of the notice defines ■ The liability is recurring in nature; and
deduction for state income taxes paid an SITP to include any amount paid ■ The amount of the liability is not ma-
and not be subject to Sec. 212. There- by an S corporation or partnership to terial or the accrual of the liability for
fore, an expense does not automatically a state to satisfy its liability for the that tax year results in a better match-
become nondeductible just because it is state’s income taxes. Section 3.02 also ing of the liability with the income to
derived from a Sec. 212 activity. discusses the deductibility of SITPs, which it relates. 11
As an SITP is deemed to qualify as allowing an S corporation or partner- Therefore, an accrued SITP at the end
a Sec. 164 deduction even if it is related ship a deduction when computing of the tax year may be deductible in that
to investment activities, it is not subject its taxable income for the tax year in year, provided the above tests are met. It
to miscellaneous itemized deduction which an SITP is made. However, the cannot be overlooked that an SITP must
limitations. The TCJA added Sec. notice clarifies that the ability for an S be fixed to fall under the recurring-item
67(g), which provides that no miscel- corporation or partnership to deduct exception. The timing of the election
laneous itemized deductions, including an SITP is “based on the statutory and must be reviewed and can vary by state.
expenses associated with the production administrative authorities described Some states require the election to pay
of income, are allowed for any tax year in section 2 of this notice.” Section 2 the SITP to be made in the year to which
beginning after Dec. 31, 2017, and includes authorities upon which the it relates, while other states require an
before Jan. 1, 2026. However, Sec. 164 notice is based, including Sec. 164(a), election to be made only in the initial
deductions are specifically excluded which allows a deduction for state year, with the election binding for the

9. Regs. Sec. 1.212-1(o). 11. Regs. Sec. 1.461-5(b)(1).
10. Regs. Sec. 1.446-1(c)(1)(ii)(A).

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