Since the enactment of the Tax Cuts and Jobs Act (TCJA), states have been modifying their tax structures to assist resident individuals who are now subject to a $10,000 cap on deducting state and local taxes at the federal level. The limitation only applies to individuals and does not apply to businesses. Accordingly, certain states have implemented a pass-through entity (PTE) level tax to bypass the limitation. On December 14, 2018, Wisconsin became the second state to successfully enact such legislation.
Pursuant to Wisconsin law, PTEs include partnerships, limited liability companies and “tax-option corporations,” also known as S Corporations. Under the new law, PTEs annually may elect to be taxed at the entity level for taxable years beginning in 2018 for S Corporations and 2019 for all other PTEs. The election must be made by the due date or extended due date of the entity’s Wisconsin income tax return.
The election for S Corporations is made on Form 5S, Wisconsin Tax-Option (S) Corporation Franchise or Income Tax Return. A new schedule, Form 5S-ET, will allow PTEs to calculate the tax. The Wisconsin Department of Revenue (Department) does not anticipate this new schedule will be available until July 19, 2019. Therefore, S Corporations making the election may have to extend their income tax filing to determine their tax due.
To make the election, an S Corporation must have consent from more than 50% of the shares on the day on which an election is made. All other PTEs must have consent from more than 50% of the capital and profits interests on the day on which an election is made. If an election is made, the entity is taxed at the highest corporate rate of 7.9%, as opposed to the highest individual rate of 7.65%. PTE owners of electing entities exclude from their distributive share the income that is subject to the new tax.
The entity level tax is imposed on Wisconsin source net income and is due in quarterly estimated payments. State law provisions relating to estimated payments and underpayment of interest apply to tax years beginning in 2019 and thereafter. If a PTE fails to pay the amount of tax owed, the Department may collect the amount from the owners based on their proportionate share.
The adjusted basis of a PTE owner's interest is determined as if the election were not made. Electing PTEs may not claim losses or PTE tax credits, with the exception of credits for income taxes paid by the PTE to other states.
As with any new tax law, some details remain unclear. As such, the Department has announced that more information will be published in an early 2019 Wisconsin Tax Bulletin. Overall, the Wisconsin PTE tax may offer certain owners of PTEs the opportunity to reduce their overall tax burdens.
>>Read one of our previous posts for more information on state workarounds:
"Connecticut Passes State and Local Tax Deduction “Work Around”: May Require Action Before June 15 Payment"
"New York Issues Guidance on Payroll Expense Tax “Workaround” for State and Local Tax Deduction Cap"
"IRS Puts a Stop to Charitable Deduction State and Local Tax “Workarounds”
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.