The Internal Revenue Service on Monday announced that it intends to issue proposed regulations to confirm the federal deductibility of state taxes at the partnership or S-corporation level for those entities and that the individual limitation does not apply.
The 2017 tax reform law established a $10,000 limitation on the amount of state and local taxes deductible by individuals. Owners of pass-through entities, such as partnerships and S-corporations, pay federal and state taxes on their pro-rata share of pass-through income on an individual basis. Accordingly, the state and local tax limitation is applicable in most cases. To address this issue and allow for some level of parity with C-corporations, a number of states have adopted laws that assess the state taxes on the partnership or S-corporation instead of the individual, effectively allowing a deduction for the owners. The announcement by the IRS is a welcome confirmation for organizations doing business in those states that have adopted these types of tax laws.