New Louisiana Pass-Through Entity Tax Legislation
The 2017 Federal Tax Cut & Jobs Act established a $10,000 limit for individual taxpayers on the federal itemized deduction for state and local taxes and also raised the standard deduction. Due to these changes, fewer individuals are benefiting from deducting their Louisiana state income taxes.
Louisiana recently passed a law in response – Senate Bill 223 – allowing partnerships and S corporations to elect to be taxed by the state on the owner’s pass-through income at the business level. Making this election will result in Louisiana income tax being paid by the business on a corporate tax return instead of being included as income by the owner on his or her individual tax return. While S corporations are currently required to file a Louisiana tax return to report their exemption from tax, partnerships have not previously had to file a return. If this election is made, partnerships would now be required to file a Louisiana tax return. The business will pay Louisiana income tax under the state’s married-filing-jointly tax rates. Owners will still receive a Form K-1 from the business; this income will be taxed at the federal level but excluded from the owner’s individual Louisiana return.
Since the business is paying the income tax, it would claim the deduction for taxes paid on the business’s federal tax returns, effectively passing that deduction down to the owner. However, IRS attorneys are looking into the deductibility of state taxes paid under an optional election, and it is unclear if the deduction will be allowed at this time. Louisiana is not the first state to enact something along these lines. There are advantages and disadvantages depending on the individual owners’ circumstances and the circumstances of individuals further up the chain in tiered partnerships, such as residency status and those that have losses being carried forward to next year.
This election is optional. It must be made by April 15, 2020. Any planning and discussions among owners will have to take place in advance since the decision will apply to all owners. Also, since the relevant facts to make the decision are on the owners’ personal tax returns, those owners may need time to discuss their circumstances with their respective tax advisors independently and prior to the group’s decision.
If the election is made, the business should start making Louisiana quarterly estimated payments as soon as possible to avoid late payment penalties. If you would like assistance to determine whether this election would be beneficial for you, please contact one of our tax professionals at (225) 927-6811.