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The IRS on November 9 issued Notice 2020-75, informing taxpayers of forthcoming proposed regulations designed to clarify that state and local income taxes imposed on, and paid by, a partnership or an S corporation on its income are allowed as a deduction in computing the entity’s non-separately stated taxable income or loss for the tax year of payment. Under the regulations, partnerships and S corporations could deduct state and local income taxes against ordinary income, with no addback required at the individual partner or shareholder level.

The regulations are proposed to apply to Specified Income Tax Payments made on or after November 9, 2020. As described below, taxpayers may apply the proposed rules to payments made in entity tax years ending after December 31, 2017.