The IRS has now released guidance that proposed regulations will be released that will allow partnerships and S corporations to deduct state and local income taxes imposed on the entity.[1] This development resolves an issue that has been around since Connecticut enacted the first passthrough tax following the passage of the Tax Cuts and Jobs Act.

The IRS has released final regulations updating guidance on cases when a payment to a charity will be treated as a payment of an ordinary and necessary business expense under IRC §162 in TD 9907.[1] The regulations also contain provisions that clarify situations when a donation to a charity that results in a credit against state and local taxes can be deducted as an additional payment of those taxes.

The IRS has released a new set of proposed regulations on charitable contributions, quid pro quo issues and state tax deductions.[1]  But, most interestingly, these regulations omit any discussion of IRS actions to deal with state passthrough tax workarounds to the $10,000 limit on the deduction of most state and local taxes by individuals.

In Politico’s Morning Tax on February 21, 2019 a potential loophole regarding property taxes paid by owners of units in housing cooperatives is discussed.  As the article notes:

So why might living in a co-op give taxpayers a way around the SALT cap? In short, co-op owners don’t pay a property tax, or actually buy a property as it’s usually understood, as Pro Tax’s Brian Faler reported. That matters because lawmakers bypassed the section of the tax code that does allow co-op owners to deduct their version of property taxes — essentially a fee paid to the corporation that owns the property, which then pays the taxes — when drafting the TCJA.

The article does caution it’s “not apparent whether co-op owners can assume they’re in the clear, at least for now, on property taxes.”  But what exactly is the issue?

The battle lines are being drawn between the IRS and various states upset about the $10,000 limit on state and local taxes.  The most recent evidence of this is found in an IRS Information Letter to New Jersey’s Attorney General (INFO 2018-009). 

This letter deals with a planning option pushed by some states for their residents at the end of 2017, allowing for the prepayment of 2018 property taxes before the new $10,000 deduction limit came into the law for 2018 returns.  The IRS issued a news release (IR 2017-20) on December 27, 2017 that indicated the IRS’s position, limiting any deduction only to taxes actually assessed before that date.

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