The federal Tax Cut and Jobs Act caps an individual’s deduction for state income taxes and property taxes.
The cap is $10,000. The change is effective for 2018.
In December, Wisconsin enacted legislation to help owners of S corporations and partnerships get around the cap.
The new law allows a pass- through entity to elect to have Wisconsin income tax imposed directly on the entity.
If the election is made, the pass-through entity pays Wisconsin income tax on its income. The owners then do not report the income on their individual Wisconsin tax returns.
Because the pass-through entity pays the tax, it can deduct the payment on its federal income tax return. That deduction then flows through to the owners by reducing the entity’s federal ordinary income.
Thus, the owners enjoy an indirect deduction for the state income taxes paid.
The tax rate paid by the entity is 7.9%. That’s slightly higher than the top rate on individuals of 7.65%.
However, owners are still ahead by receiving the deduction for the state taxes paid. The only credit that a pass-through entity may claim is the credit for taxes paid to another state.
The election is made on a year by year basis. A pass-through entity can pay tax one year and pass through income to owners the next.
For S corporations, the election is first available for 2018. For partnerships, it is first available for 2019.
The election is not for everyone.
A manufacturing company should not make the election. If it does, it will lose the Wisconsin Manufacturing Credit.
Others that may not benefit are companies where owners have a net operating loss or other individual tax attribute that will be lost if the election is made.
For more information, consult your FOS attorney.