On December 14, 2018, Wisconsin enacted legislation that allows pass-through entities such as partnerships and S corporations to elect to pay state income tax at the corporate level rather than passing the income through to the individual owner(s) to be taxed at the individual level. This results in a federal deduction for the full amount of state tax paid. The election might be beneficial for taxpayers who are now subject to limitations on the deduction of state and local taxes at the individual level.
Under the Tax Cuts and Jobs Act (TCJA) and effective 2018, individuals are now limited to a total deduction of $10,000 for state and local taxes combined. To illustrate, under pre-TCJA law, a taxpayer who paid $6,000 in real estate taxes and $9,000 in Wisconsin income tax would be able to deduct $15,000 on their federal return if itemizing. Under the Tax Cuts and Jobs Act, the total deduction would now be limited to $10,000. For a Wisconsin owner of a partnership or S corporation, the election would allow them to shift some of the state income tax from their individual returns (where a federal deduction might be limited), to the corporate return where it could be deducted in full.
S corporation owners may make the election for tax years beginning January 1, 2018. However, these owners will need to file for corporate extension as forms are not expected to be ready until July of 2019.
Partnerships must wait to make the election for tax years beginning January 1, 2019.
Please contact us if you have questions.