Late in 2018, Wisconsin enacted a pass-through entity tax allowing pass-through entities to elect to be taxed at the entity level instead of flowing through their income to their owners. The new tax is an annual election made when filing a partnership or S corporation return. The consent of partners or shareholders owning more than 50 percent of the pass-through entity is required.
It is effective for S corporations beginning with the 2018 tax year and for other pass-through entities beginning with the 2019 tax year.
Due to federal tax reform, the deduction of state income taxes and real estate taxes is limited to $10,000 for individuals. Many dentists pay more than this, which means they are paying state taxes for which no deduction will be allowed on their individual return. By electing to have pass-through income taxed at the entity level rather than on the individual return, it may allow for a deduction of the entity level taxes paid on the entity’s federal income tax return, thereby making that portion of the state tax payments deductible.
This new deduction could be challenged by the IRS and disallowed. Additionally, the tax rate paid by the entity is the top Wisconsin corporate rate of 7.9 percent. Further, certain tax benefits like the ability to deduct 30 percent of long-term capital gains will not be available. These and other factors should be considered when deciding if electing to pay Wisconsin tax at entity level is best for your situation.
We highly recommend consulting your tax adviser to see if this is an option for you.
More details can be found at https://www.bakertilly.com/insights/wisconsin-enacts-a-pass-through-entity-tax/
