IRS Clarifies Deductibility of State and Local Taxes for Partnerships and S-Corps

The Internal Revenue Service (IRS) has issued Notice 2020-75 PDF, which announces rules to be included in forthcoming proposed regulations. Specifically, the proposed regulations will clarify that State and local income taxes imposed on and paid by a partnership or 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, and therefore are not subject to the State and local tax deduction limitation for partners and shareholders who itemize deductions.

The notice PDF describing the forthcoming proposed regulations applies to these types of income taxes starting today, and also allows taxpayers to apply these rules to specified income tax payments made in a taxable year of a partnership or an S corporation ending after Dec. 31, 2017, and before the date the forthcoming proposed regulations are published in the Federal Register.

Updates on the implementation of the Tax Cuts and Jobs Act (TCJA) can be found on the Tax Reform page of IRS.gov.