In December of 2018, Wisconsin enacted a provision designed to enable S corporations, partnerships (including LLC’s taxed as partnerships) and their owners to work around the $10,000 federal limit on the deduction of state and local income taxes at the individual owner level. Wisconsin accomplished this by allowing S corporations and partnerships to elect to pay Wisconsin tax at the entity, as opposed to the owner, level. The deduction for the state tax payment then flows through to the owners free of the $10,000 federal limit.
Since Wisconsin took this action, some uncertainty has existed as to whether the IRS would challenge this provision as contravening the intent of the federal deduction limit. Wisconsin taxpayers can now breathe a sigh of relief.
The IRS recently announced, through Notice 2020-75, that it will issue regulations blessing the federal deduction for state income taxes paid by an S corporation or partnership that flows through to owners. Wisconsin taxpayers may rely on the notice retroactively to the enactment of the Wisconsin provision.
If you have any questions regarding the Wisconsin provision, the IRS notice, or their impact on you and your S corporation or partnership, contact your FOS attorney.