IRS Provides Certainty Regarding Deductibility of Payments by Partnerships and S Corporations for State and Local Income Taxes

November 12, 2020

The IRS recently issued Notice 2020-75, which announces rules to be included in forthcoming proposed regulations regarding the deductibility of payments by partnerships and S corporations for state and local income taxes.

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 describing the forthcoming proposed regulations applies to these types of income taxes starting Nov. 9, 2020. It 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.