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Wisconsin Enacts a Pass-Through Entity Tax

December 20, 2018

On December 14, 2018, Wisconsin Governor Scott Walker signed Wisconsin Act 368 as a response to the Tax Cuts and Jobs Act. This recently enacted legislation allows S corporations, partnerships and limited liability companies to be taxed at the entity level, rather than passing through the income to its shareholders, partners, or members.

Why would you want to consider this when the highest individual tax rate is 7.65% and the corporate tax rate is 7.9%?  This election would create a deduction against federal income for the Wisconsin taxes paid which might not be available if the income was passed through and taxed at the individual owner level.  Many taxpayers will already be at the new $10,000 cap for state income and real estate taxes, so they wouldn’t get any tax benefit on their individual returns for the state taxes created by the pass-through entity.  

Electing to be taxed at the entity level is not permanent. This is an annual election, meaning you can decide whether to elect in or out of the pass-through entity tax each year.  The majority of the entity’s ownership must consent to the tax by the due date or extended due date of the entity’s Wisconsin tax return.

Sounds like a good deal, right?  Well, there are some limitations that need to be considered, such as losing the ability to take any credits except for taxes paid to other states and being unable to claim the long-term capital gain exclusion.  And to further consider, the IRS has yet to release guidance as to whether the election will be respected for purposes of deducting state income taxes. Therefore, whether or not an entity should make this election will need careful consideration.

S-corporations can start making this election for tax years beginning on or after January 1, 2018, while partnerships and LLCs will start having this option beginning in 2019.

We will keep you updated as more information becomes available.  If you have any questions or would like to discuss the potential benefit for your pass-through entity, please contact your SVA tax advisor.