Louisiana Reacts to the Federal Cap on State and Local Tax Deductions

New law enables pass-through entities to pay — and deduct — state tax at entity level

On June 22, 2019, Louisiana governor John Bel Edwards signed into legislation Senate Bill 223, which enables pass-through entities like partnerships and S corporations to elect to be taxed at the entity level. The purpose of this litigation is to mitigate the effects of the federal cap on state and local tax deductions instituted as part of the 2017 tax reform. Essentially, the law aims to give these pass-through entities, who often pay tax at the individual owner level, a way to deduct state taxes from federal income tax calculations, since there is no cap on deductions for state and local corporate taxes.

Under this legislation, which is effective for tax years beginning on or after January 1, 2019, eligible entities must elect to file Louisiana tax returns as a C corporation, in writing, any time during the current tax year, or on or before the 15th day of the fourth month after the close of the tax year. Eligible pass-through entities are those that are classified as partnerships for federal income tax purposes, and the owners, partners or members holding more than 50% of the entity ownership must vote to make this election. A majority ownership must also vote to rescind the election.

If pass-through entities choose to be taxed at the entity level, they are subject to the same graduated state tax rates as married taxpayers filing jointly:

• 2% on the first $25,000 of taxable income
• 4% on $25,001 to $100,000 of taxable income
• 6% on all taxable income over $100,000

In calculating federal taxable income, eligible entities are permitted to deduct Louisiana state tax paid. However, nonresident taxpayers cannot deduct Louisiana tax paid from their other state returns.

Would electing to pay income tax at the entity level be beneficial for your members? That depends on many different factors. If this choice applies to you, or you want to learn more, contact Weaver to discuss the pros and cons for your specific situation. More details to follow once the DOR releases guidance.

© 2019