In 2021, state legislatures have accelerated their consideration of new pass-through entity (PTE) level tax regimes. The November 2020 release of IRS Notice 2020-75 (see our previous Insight) may be partially spurring the recent state legislative activity. Notice 2020-75 validated the position that a PTE-level state tax deduction passed on to PTE members would not be limited by the $10,000 individual state and local itemized deduction limit set by the 2017 federal tax reform. Based on the IRS guidance, certain PTE owners may see significant benefits from the implementation of state PTE tax regimes.
When analyzing the impact of these PTE taxing regimes, most of which are elective, taxpayers should be prudent in their modeling as each PTE’s facts and circumstances can impact the ability of their owners to benefit from the federal individual income tax deduction of these taxes. Additionally, taxpayers will need to consider the unique mechanics of each state taxing regime when modeling out potential benefits to the owners.
