Proposed IRS Regulations Will Address State and Local Tax Payments Made by Partnerships and S Corporations (Notice 2020-75; IR-2020-252),(Nov. 10, 2020)


Some state and local jurisdictions have enacted or are considering entity-level income tax on partnerships and S corporations, sometimes with a corresponding credit, deduction or exclusion for the owners. It is not certain if the entity’s payment of such taxes must be taken into account in applying an owner’s SALT deduction limit.

The IRS intends to issue proposed regulations that clarify that the partnership or S corporation can deduct Specified Income Tax Payments in computing taxable income for the year the payment is made. The Specified Income Tax Payments will be reflected in a partner’s or a shareholder’s distributive or pro-rata share of non-separately stated income or loss, and (1) is not an item of deduction that a partner or shareholder takes into account separately in determining its own federal income tax liability; and (2) is not taken into account in applying the SALT deduction limitation to any individual partner or shareholder.