The Treasury today blessed pass-through entity taxes enacted in response to the $10,000 cap on itemized deductions for state and local taxes. This clears up a big open question from the 2017 Tax Cuts and Jobs Act.
Notice 2020-75 says that partnerships and S corporations will be allowed to fully deduct entity-level state and local taxes on their federal returns - even if the taxes are elective, and even if the entity owners get a credit on their state or local returns as a result. The notice says the regulations will be issued applying this result for payments made starting November 9, 2020, but that payments made prior to that date under existing state laws will also qualify.
A number of states have enacted laws either requiring or allowing partnerships and S corporations to pay taxes at the entity level, rather than at the individual level, to bypass the $10,000 SALT deduction cap. States with such taxes include Oklahoma, Wisconsin, New Jersey, Connecticut, Rhode Island and Louisiana.
Iowa has an entity-level tax on S corporation banks that generates a shareholder-level tax credit.