Michigan SALT workaround

Technical topics regarding tax preparation.
#1
Posts:
267
Joined:
23-Jan-2015 11:10pm
Location:
michigan
On Dec. 22, Michigan Treasury announced a SALT workaround for flow-through entities such as S corps. whereby the entity can pay a tax based on the entity's net income equivalent to the MI individual tax rate and pass the benefit on to the S shareholders or partners on their schedule K-1's so that these owners can take credit for the tax paid by the entity on their individual MI-1040. Unfortunately, the state has passed very little information on their website regarding this. Would anyone know if an accrual basis entity can make a payment in 2022 for the 2021 taxable year and what the deadline might be for making that payment? I know it has to be made through the state portal.
 

#2
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
if we look at Notice 2020-75 you will see the IRS has created a term called "Specified Income Tax Payment". The notice defines “Specified Income Tax Payment” means any amount paid by a
partnership or an S corporation to a State, a political subdivision of a State, or the
District of Columbia (Domestic Jurisdiction) to satisfy its liability for income taxes...

While I believe the basis of accounting should play into the outcome here, and the outcome should not be different unless something passed by congress would create a different outcome. You see what I'm saying. The IRS clearly wants us to be on the cash basis with Salt workarounds, but why? Is the notice a clear reflection of the underlying statutes? Namely 164. I think we need to beat this topic up and see what the experts here have to say. btw I beleive your question applies to all states.

good question. thank you,
Terry
 

#3
Posts:
70
Joined:
2-Sep-2020 12:38pm
Location:
Southeastern Wisconsin
I'm in Wisconsin and have a similar situation with a taxpayer that's on the accrual basis and wants to use the S Corp workaround. To get the deduction we rushed ahead estimated the tax due and had the payment made by December 31st.

IRS Notice 2020-75 does say "If a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made."

It seems to me the IRS is being specific in saying that it can only be deducted in the year paid, not when it's actually accrued. If I were in your shoes I'd advise your client that that the payment will be made in 2022 and will be deductible on next year's 2022 tax return.

With this issue any state's issued regulation will not be worth much because the whole point of the SALT workaround is to deduct it on the federal in which case we have to rely on IRS guidance which seems to me to point to only deducting in the year actually paid.
 

#4
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
Hi UncleSam, thank you for your reply. I'm looking for a deeper dive on this topic, so with respect to the notice I believe the questions are does:
1) the IRS have the authority to limit the scope of 164, as the notice provides, or
2) is the IRS correctly interpreting 164, 164 applies to tax payments made only, or
3) is it just a good idea to follow the IRS, as well it is true

thank you
 

#5
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
Michigan treasury just released some guidance on their workaround.

https://www.michigan.gov/documents/trea ... 5849_7.pdf

totally unrelated to the thread, but I thought the thread was apltly titled.
 

#6
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
If you're in Michigan note the election time frame for 2022 being March 15. That's on page 3 of the linked doc.
 

#7
JAD  
Posts:
4022
Joined:
21-Apr-2014 8:58am
Location:
California
Terry Oraha wrote:I'm looking for a deeper dive on this topic,


Another point raised by a CA CPA who teaches many seminars is this: can an elective tax even be a Sec. 162 or 164 expense? She seems to question the underlying theory that allowed the deduction (several of us here have questioned that on previous threads). Also, of course, how is the elective tax deductible when it is in exchange for a credit on the individual's return? This is a complete farce, and we are all trying to figure it out based upon a notice, which isn't even high up in terms of ranking the weight of its authority.
 

#8
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
Stumbled upon this: https://www.natlawreview.com/article/mi ... -taxpayers

thought it was interesting, but didn't say much else. Except for the famous "given the lack of uncertainty in this area"...

Jad i thought your post was interesting too. Has me thinking. still thinking. quietly in the background.
 

#9
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
I'm not sure i understand how the elective nature of the tax undermines 162 or 164. Isn't every expendiure of a business elective in some sense. If I'm having lunch wiht a client i could offer to pay or have alligator arms. This questoin of having the choice to spend or not, is new to me. My mind tends to go to the fact that there was an expenditure. Then I will want to see what it was for to get at how it relates to the business to test for deductibiliity. So there is a history of business deductions being voluntary and still being deductible. There is also a history of taxes needing to be assessed. That must be the problem. However,

...the IRS blessed the elective nature of SALT workarounds, but would it be held a business expense in the absense thereof (of this permission). Or do Salt workarounds (the deduction for federal income tax) derive there being from the Notice 2020-75 (the permission). See whether the elective nature is approrpriate is a good question, but rendered moot because the IRS has allowed it. I assume, based on certain underlying tax laws. Given that, can the IRS then restrict those underlying tax laws? The answer must be no. Because there is no underlying reasoning (check the notice) or supported argument for their interpretation of "Specified Income Tax Payment". Can anyone glean from the notice any underlying authority for that term?
 

#10
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
wooow .guess what Notice 2020-75 says.

To achieve the purpose described in section 3.01 of
this notice, the Treasury Department and the IRS expect to propose regulations
consistent with the provisions set forth in this section 3.02.

There it is. The IRS will create underlying authority to support the term Specified Income Tax Payment. Or they will write in their understanding of how accrual based taxpayer's will need apply these rules. I'm of the opinion that the method of a taxpayer should bear on these rules rather than have these rules not consider a taxpayer's method. I guess we'll see.
 

#11
JAD  
Posts:
4022
Joined:
21-Apr-2014 8:58am
Location:
California
Terry Oraha wrote:I'm not sure i understand how the elective nature of the tax undermines 162 or 164.


All good points. The woman who spoke is brilliant, and I think I am not fully remembering her reasoning. I agree that the point might be moot because right now what we have is an IRS notice saying that these laws work to create a deductible tax. What I think is interesting is that the IRS has not yet issued proposed regulations. And once they do, they will have to go through comment and response.

Why wouldn't the tax be deductible in the year that it is related to if the taxpayer is accrual?

How can the tax possibly be deductible if it is in exchange for a credit on the individual's tax return? An enormous portion of Subchapter K is about sorting out transactions between the partner and the partnership that don't have economic reality or are designed solely to avoid certain tax ramifications.

The IRS approved a strategy, and some of us believe that doing so was political, to subvert "Trump's tax law", and now the IRS is in the position of having to issue Regs that provide guidance when there are over 20 states with slightly different versions of this strategy. What a mess.
 

#12
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
I can't look it up right now because I'm too tired, but i think the IRS put something out that put the state credits on par with charitable orginazations. In other words if you get any benefit for paying the tax you have to reduce the deduction by the applicable value received in exchange for the tax (or gift)...

You're absolutely right about the politics here and the messs. And props to Uncle Sam for suggesting we just follow the IRS here. That's what many will do and I don't blame them. The problem is wanting to help our clients we have to wade through the swamp.
 


Return to Taxation



Who is online

Users browsing this forum: CaptCook, golfinz, HowardS, JAH, JoJoCPA, KoiCPA, lckent, SALYstrikesagain and 208 guests