Wisconsin to Allow Entity-Level Taxation of Pass-through Entities

On December 14, 2018, Wisconsin enacted legislation that allows pass-through entities such as partnerships and S corporations to elect to pay state income tax at the corporate level rather than passing the income through to the individual owner(s) to be taxed at the individual level.  This results in a federal deduction for the full amount of state tax paid.  The election might be beneficial for taxpayers who are now subject to limitations on the deduction of state and local taxes at the individual level.

Background

Under the Tax Cuts and Jobs Act (TCJA) and effective 2018, individuals are now limited to a total deduction of $10,000 for state and local taxes combined.  To illustrate, under pre-TCJA law, a taxpayer who paid $6,000 in real estate taxes and $9,000 in Wisconsin income tax would be able to deduct $15,000 on their federal return if itemizing. Under the Tax Cuts and Jobs Act, the total deduction would now be limited to $10,000.  For a Wisconsin owner of a partnership or S corporation, the election would allow them to shift some of the state income tax from their individual returns (where a federal deduction might be limited), to the corporate return where it could be deducted in full.

Basic Provisions 

• The election is made annually on or before the corporate due date (or extended due date if extended).
• If the election is made, the corporate entity's net income attributable to Wisconsin would be taxed at a flat 7.9% rate. It's important to note that this is higher than Wisconsin's top marginal rate of 7.65% for individuals.
• No net operating loss (or carryover) is allowed at the corporate level.  For years where a net loss is incurred, a taxpayer would not make the election, thus allowing the loss to pass through to their individual return where the net operating loss may be claimed.
• The election must be agreed upon by owners comprising more than 50% ownership of the entity.
• Estimated payment and underpayment interest laws apply.  The Department of Revenue has the right to assess and collect any corporate-level tax from the owners/shareholders individually in proportion to their respective ownership.

S corporation owners may make the election for tax years beginning January 1, 2018.  However, these owners will need to file for corporate extension as forms are not expected to be ready until July of 2019.

Partnerships must wait to make the election for tax years beginning January 1, 2019.

Please contact us if you have questions.