IRS Announces Intent to Issue SALT Deduction Regulations
for Pass-Through Entities
The IRS, in Notice 2020-75, announced that it, along with
the U.S. Department of the Treasury, intends to issue proposed
regulations to clarify that State and local income taxes (SALT)
imposed on and paid by a partnership or an S corporation on its
income are allowed as a deduction by the partnership or S
corporation in computing its non-separately stated taxable income
or loss for the taxable year of payment. The 2017 Tax Cuts and Jobs
Act (TCJA) added Section 164(b)(6), which states that an
individual's deduction for SALT (which includes a tax imposed
by a State, a possession of the United States, (U.S. territory), or
a political subdivision of any of the foregoing, or by the District
of Columbia) paid during a calendar year is limited to $10,000. The
$10,000 limit applies to (1) real property taxes; (2) personal
property taxes; (3) income, war profits and excess profits taxes;
and (4) general sales taxes. This limitation applies to tax years
beginning after Dec. 31, 2017, and before Jan. 1, 2026. The $10,000
SALT limit does not include foreign taxes or state and local taxes
that are paid or accrued in carrying on a trade or business or an
investment activity. (All Section references are to the Internal
Revenue Code of 1986, as amended.)
Generally, the Code disallows certain deductions to partnerships and S corporations in determining their taxable income, and instead, such items must be separately stated and taken into account pro rata by the partners or shareholders of such entity. However, the anticipated proposed regulations will clarify that Specified Income Tax Payments (defined below) are deductible by partnerships and S corporations in computing their non-separately stated income or loss. A "Specified Income Tax Payment" means any amount paid by a partnership or an S corporation to a State, a political subdivision of a State, or the District of Columbia, but not U.S. territories or their political subdivisions, (Domestic Jurisdiction), to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation. A Specified Income Tax Payment includes any amount paid by a partnership or an S corporation to a Domestic Jurisdiction pursuant to a direct imposition of income tax by the Domestic Jurisdiction on the partnership or S corporation, without regard to whether the imposition of and liability for the income tax is the result of an election by the entity or whether the partners or shareholders receive a partial or full deduction, exclusion, credit, or other tax benefit that is based on their share of the amount paid by the partnership or S corporation to satisfy its income tax liability under the Domestic Jurisdiction's tax law and which reduces the partners' or shareholders' own individual income tax liabilities under the Domestic Jurisdiction's tax law.
If a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for such taxable year. The Specified Income Tax Payment does not constitute an item of deduction that a partner or an S corporation shareholder takes into account separately in determining the partner's or S corporation shareholder's own Federal income tax liability for that same taxable year. Any Specified Income Tax Payment made by a partnership or an S corporation is not taken into account in applying the SALT deduction limitation to any individual who is a partner or an S corporation shareholder. Notice 2020-75 can be relied upon prior to the issuance of the anticipated proposed regulations and, generally, can be relied upon for taxable years of a partnership or S corporation ending after Dec. 31, 2017, in which a Specified Income Tax Payment is made before Nov. 9, 2020.
IRS Issues Information Letter on SALT Deduction
Cap's Application to Co-Op
The IRS, in Information Letter #2020-0010, held that the
SALT limitation under Section 164(b)(6) applies to the deduction
taken into account by a tenant-stockholder under Section 216 for
the tenant-stockholder's proportionate share of the real estate
taxes paid or incurred by a cooperative housing corporation.
IRS Issues Final Regulations on First-Year Bonus
Depreciation Deduction
The IRS has released final regulations regarding the first-year
bonus depreciation deduction under Section 168(k). (See our prior
coverage here.) Under the TCJA, the
first-year depreciation deduction under Section 168(k)(1) was
increased to a 100% deduction, and the property eligible for this
first-year depreciation deduction was expanded. These final
regulations adopt the proposed regulations, issued in September
2019, with some modifications. Specifically, these final
regulations address: (1) rules relevant to the definition of
qualified property, (2) rules for consolidated groups, (3) rules
regarding components acquired or self-constructed after Sept. 27,
2017, for larger self-constructed property for which manufacture,
construction, or production began before Sept. 28, 2017, (4) rules
regarding the application of the mid-quarter convention, as
determined under section 168(d), and (5) changes to the definitions
in the 2019 Final Regulations (which were issued concurrently with
the 2019 proposed regulations) for the terms qualified improvement
property, predecessor, and class of property.
Additionally, these final regulations withdraw the "Partnership Lookthrough Rule." The Partnership Lookthrough Rule provided that a person is treated as having a depreciable interest in a portion of a property prior to the person's acquisition of the property if the person was a partner in a partnership at any time the partnership owned the property. The Treasury Department and the IRS agreed with comments received about the rule and decided to withdraw it because its application would place a significant administrative burden on both taxpayers and the IRS. Therefore, under these final regulations, a partner will not be treated as having a depreciable interest in partnership property solely by virtue of being a partner in the partnership.
These final regulations are effective 60 days after the date published in the Federal Register.
IRS Provides Bonus Depreciation Guidance
The IRS, in Revenue Procedure 2020-50, released guidance
with regard to claiming the bonus depreciation deduction for:
- certain depreciable property acquired and placed in service after Sept. 27, 2017, by the taxpayer during its taxable years ending on or after Sept. 28, 2017, and before the taxpayer's first taxable year that begins on or after Jan. 1, 2021;
- certain plants planted or grafted, as applicable, after Sept. 27, 2017, by the taxpayer during its taxable years ending on or after Sept. 28, 2017, and before the taxpayer's first taxable year that begins on or after Jan. 1, 2021; and
- components acquired or self-constructed after Sept. 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its taxable years ending on or after Sept. 28, 2017, and before the taxpayer's first taxable year that begins on or after Jan. 1, 2021.
The Revenue Procedure. allows a taxpayer that retroactively applies Treasury Regulation Sections 1.168(k)-2 and 1.1502-68 (which allows taxpayers to choose to apply the rules thereunder prior to the applicability dates) or relies on the 2019 proposed regulations to either make a late election or to revoke an election under Sections 168(k)(5), (k)(7), or (k)(10), or Treasury Regulation Section 1.168(k)-2(c) of the 2019 proposed regulations, for the taxpayer's taxable years ending on or after Sept. 28, 2017, and before the taxpayer's first taxable year that begins on or after Jan. 1, 2021.
PA DOR Issues Telework Guidance
The Pennsylvania Department of Revenue (PA DOR) has issued
guidance relating to telecommuting during the
COVID-19 pandemic. The guidance provides the sourcing of an
employee's income does not change if such an employee is
temporarily working from home because of the pandemic. For example,
the compensation of non-residents who were working in PA before the
pandemic remains PA sourced income for all PA tax purposes.
Conversely, the compensation of PA residents who were working
out-of-state before the pandemic remains sourced to the other
state, and such employees would still be able to claim a resident
credit for tax paid to the other state on the compensation. A
Pennsylvania employer is required to withhold against the
compensation paid to a non-resident employee temporarily working
from home due to the COVID-19 pandemic in a state that doesn't
have a reciprocity agreement with Pennsylvania. As a result of the
COVID-19 pandemic causing people to temporarily work from home, the
department will not seek to impose Corporate Net Income Tax nexus
or Sales and Use Tax nexus solely on the basis of this temporary
activity. This guidance will be in effect until the earlier of June
30, 2021, or 90 days after the Proclamation of Disaster Emergency
in Pennsylvania is lifted.
Philadelphia DOR Updates Withholding Guidance
The Philadelphia Department of Revenue (DOR) has updated
its wage tax guidance for
Philadelphia-based employers. It provides that a non-resident
employee is not subject to the wage tax when the employer requires
them to perform a job outside of Philadelphia, including working
from home for the days spent fulfilling such work. However, a
non-resident employee who works from home for his or her
convenience (regardless of employer authorization) is not exempt
from the wage tax. Non-resident employees who had Wage Tax withheld
during the time they were required to perform their duties from
home in 2020, may file for a refund with a wage refund petition in
accordance with the guidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.