It’s rare to see the IRS announce something that benefits taxpayers, but it’s 2020—weirder things have happened. In a recent notice, Notice 2020-75, the IRS announced an important lifeline for partnerships and S-corps allowing these entities to deduct state and local taxes.

Partnerships and S-Corps Can Deduct State and Local Taxes (SALT)

As reported by Journal of Accountancy, the IRS said it would issue proposed regulations allowing S corporations and partnerships to deduct “specified income tax payments” paid to state and local governments above the line and not as passthrough items for partners and shareholders.


As highlighted in the notice, Section 164(a) of the Internal Revenue Code (Code) generally allows a deduction for certain taxes for the taxable year within which paid or accrued—state local, and foreign property taxes, state and local personal property taxes; and state and local, and foreign, income, war profits, and excess profits taxes.

Section 702(a) provides that a partner, in determining the partner’s income tax, is required to take into account separately the partner’s distributive share of certain partnership items of income, gain, loss, deduction, or credit (tax items) that are set forth in that section, as well as the non-separately computed income and loss.

However, due to Revenue Ruling 58-25, 1958-1 C.B. 95, the IRS ruled that “any tax imposed upon and paid by a partnership on the net profits of its business conducted in Cincinnati is deductible in computing the taxable income of the partnership and the partners are not precluded from claiming the standard deduction.”

The Proposal

Journal of Accountancy notes that this notice was issued to provide certainty in calculating SALT deduction limitations.

“The definition will exclude income taxes imposed by U.S. territories or their political subdivisions. This definition includes only income taxes described in Sec. 164(b)(2) for which Sec. 703(a)(2)(B) does not disallow a partnership a deduction, and those income taxes for which Sec. 1363(b)(2) does not disallow an S corporation a deduction.”

A huge development in the wake of the Tax Cuts and Jobs Act, in which a provision limited SALT deductions to $10,000. Rather than passing through tax liability to partners and shareholders, specified income tax payments paid as state and local income taxes are allowed as a deduction by the partnership or S corporation in computing its non–separately stated taxable income or loss for the tax year of payment.

When Does Notice 2020-75 Take Effect?

The proposed regulations described in this notice will apply to Specified Income Tax Payments made on or after November 9, 2020. The proposed regulations will also permit taxpayers described in section 3.02 of this notice to apply the rules described in this notice to Specified Income Tax Payments made in a taxable year of the partnership or S corporation ending after December 31, 2017, and made before November 9, 2020, provided that the Specified Income Tax Payment is made to satisfy the liability for income tax imposed on the partnership or S corporation pursuant to a law enacted prior to November 9, 2020.

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