On November 9, 2020, the Internal Revenue Service (IRS) issued Notice 2020-75 announcing that it will issue proposed regulations respecting state tax workarounds designed to avoid the 2017 Tax Cuts and Jobs Act (TCJA)’s $10,000 cap on deductible state and local taxes. This latest notice from the IRS is great news for partners, LLC members, and S Corporation shareholders receiving pass-through income.
Several states, including Maryland, have already passed legislation to circumvent this limit by allowing or requiring pass-through entities to pay state tax directly, qualifying those payments for a federal tax deduction at the entity level. The net income, after state tax, is then passed through to the owners. This converts what would have been a severely limited state tax deduction to an above the line reduction in AGI, with the potential to significantly reduce Federal tax.
Several other states—including New York, New Jersey, and Connecticut—currently have the necessary legislation in place, and pass-through entities situated in the District of Columbia already can deduct state taxes at the entity level. We fully expect other states will follow suit in the coming months and amend their respective tax statutes accordingly.
Please contact your E. Cohen tax adviser as soon as possible to discuss steps to take before year end to maximize your tax benefits for the year 2020.