With the enactment of the Tax Cuts & Jobs Act, the itemized deduction for state taxes was limited to $10,000 for taxpayers filing married filing jointly. This change in tax law was disadvantageous to those taxpayers living in high taxed states who were usually able to take advantage of a higher itemized tax deduction for the large amount of state income taxes paid.
Thus, those higher taxed states searched for a work around so that those individuals paying those higher state income taxes would still potentially see a benefit on their tax returns. Thus, states determined it would be better for the states’ taxpayers if the state charged entity level taxes on passthrough entities instead of having that state income tax paid at the individual level. Thus, this allows the business to deduct these income taxes as part of their ordinary business income. Thus, the taxpayers can take a full deduction on their share of the pass-through entity’s ordinary business income. With these pass-through entity taxes, now the individual taxpayers does not have to worry about these expenses being limited as itemized deduction to them.
Many states have adopted these types of rules, and it is expected than many more will in the future. Do not hesitate to reach out to your SDK Tax Professional if you have any questions on the impact of utilizing this provision would be.