May 21, 2023

Iowa Provides Tax Relief For S-Corp Businesses

The state of Iowa has enacted a tax provision for pass-through entities that will allow a partner or shareholder to claim a credit against the individual income and franchise taxes paid. As Reuters explained, the law is a state and local tax (SALT) limit workaround of the SALT cap imposed by the 2017 Tax Cut and Jobs Act.

The Iowa provision allows certain individual income taxpayers — owners of partnerships and S corporations who make a voluntary election — to pay an Iowa income tax through their pass-through entities (PTE) like partnerships and S corporation businesses. (The state PTE tax is treated as a business expense that lowers the taxable income that flows out of the PTE to the individual tax returns of the owners of the PTE.)

The law then allows a tax credit to compensate entity owners for the PTE tax paid, and the tax credit is split between the owners of the pass-through entity to be used when filing individual income tax returns. This mechanism allows entity owners to deduct SALT at the entity level instead of the personal income tax level and avoids the SALT cap.

Iowa’s law was necessary because the 2017 SALT cap did not apply evenly to all businesses. C corporations could continue to deduct the full value of their SALT as a business expense while pass-through businesses like S corporations and partnerships could only deduct those taxes paid by the entity, not the business owner.

The Iowa law and others like it around the country aim to restore the full deduction by allowing S corporations and partnerships to elect to pay their taxes at the entity level. If laws like these were enacted across the country, the S-Corp Association estimates more than three million pass-through businesses would receive more than $6 billion in annual tax relief, all at no cost to states.

Read more here.

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