IRS Clarifies State and Local Tax Deductibility for Partnerships and S-Corps

IRS Notice 2020-751 provides regulations to be included in forthcoming guidance. Specifically, 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.2

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  1. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes, Notice 2020-75 (2020).
  2. “IRS provides certainty regarding the deductibility of payments by partnerships and S corporations for State and local income taxes.” Internal Revenue Service. IR-2020-252, November 9, 2020.