Anyone who owns rental property and has not yet re-structured ownership into a passthrough entity now has another reason to make this change. We encourage you to call our office to get this done before year’s end to make the most out of this opportunity from the Treasury and the IRS.
The $10,000 limit on state and local tax deductions (SALT) set by the Tax Cuts and Jobs Act of 2017 did not impact corporations but created a significant burden to taxpayers and small business owners. Many small businesses are structured as passthrough entities like LLCs, Partnerships and S-Corporations. These entities are generally not paid at the entity level, but by the individual LLC partner or S corporation shareholder.
Some states, New York among them, attempted to create strategies that would help individual taxpayers who itemize on their returns, but those were blocked by the Treasury and the IRA.
Relief has now arrived for select small business owners, as long as they are passthrough entities. The IRS and the Treasury released a notice regarding proposed regulations that clarify the ability for passthrough entities to deduct certain state and local income taxes (SALT) in the same way that C-corporations do.
As detailed in IRS Notice 2020-75, the applicability date for the proposed regulations apply to Specified Income Tax Payments made on or after November 9, 2020. The proposed regulations will also permit the passthrough entities to apply the rules to Specified Income Tax Payments made in a taxable year of the partnership or S corporation ending after December 31, 2017, and made before November 9, 2020, provided that the Specified Income Tax Payment is made to satisfy the liability for income tax imposed on the partnership or S corporation pursuant to a law enacted prior to November 9, 2020.
For business owners, this is welcome relief after a grueling year when many rental property owners faced tenants who could not pay rent, retail tenants whose businesses were temporarily closed due to COVID and businesses shut their doors.
This does not apply to sole proprietorships or single-member LLCs.
The notice says this will be permitted whether or not the state’s entity-level tax is mandatory or elective. Six states had enacted an entity-level passthrough tax as an attempt to give their states’ businesses some relief. New York was not one of them.
This tax treatment is for the passthrough entity related to a business, and not for the owner’s share of the passthrough entity’s passive investment income. The Notice does not allow individual investors to put their personal investment assets into a passthrough entity and take advantage of the workaround.
Now is the time to speak with our office to find out if your business qualifies now, or to find out if your business should be changed to a passthrough entity.