On Friday, December 14, Governor Scott Walker signed legislation that allows S corporations to elect to be taxed at the entity level for taxable years beginning on or after January 1, 2018, and partnerships and LLCs elected to be treated as partnerships to elect to be taxed at the entity level for taxable years beginning on or after January 1, 2019. These entities are commonly referred to as pass-through entities (“PTEs”).
This election may be made annually and must be made by persons holding more than 50% shares (S corporations) or more than 50% of capital and profits interest (Partnerships) on the day of election. The election must be made on or before the due date or extended due date of the Wisconsin return.
The PTE may elect to be taxed at the entity level for purposes of Wisconsin income and franchise taxes. The PTE is still considered a PTE and the adjusted basis of the entity’s partners, shareholders, or members is determined as if the election were not made.
A PTE that makes this election is taxed at the corporate rate of 7.9% versus the highest individual tax rate of 7.65%. The entity making this election may not claim losses and tax credits except for the credit for income taxes paid to other states.
The only credit available to the PTE is credit for taxes paid to another state. This includes entity level tax imposed by other states and to composite income taxes paid by the PTE to other states on behalf of its owners.
Unfortunately, there is no carryover of PTE losses.
Underpayment interest will not apply to the additional tax due as a result of making the election for tax year 2018, however S corporations that make the election must pay the tax due by the unextended due date of the return in order to avoid regular interest charges. The Wisconsin Department of Revenue can assess any unpaid PTE tax to its shareholders, partners or members.
There are still many unknowns about this law and the Wisconsin Department of Revenue promises more guidance in January, 2019. Several considerations must be taken. This list is not all-inclusive:
- How does this election affect the federal return and IRS position on deducting state and local income taxes?
- If the PTE creates the Wisconsin Manufacturing and Agriculture or Research and Development tax credits, is this election worth it? (Reminder the only PTE credit allowed is for taxes paid to other states.)
- Since the entity level tax for S corporations will be calculated on Wisconsin Schedule 5S-ET, the Wisconsin Department of Revenue estimates that this form will be ready on July 19, 2019. This requires all S corporations that make this election to extend their tax returns until the form is ready. What do the shareholders do? They will likely extend their personal returns as well.
- What about cash basis PTE taxpayers? If they pay their 2018 tax bill in 2019, do they lose the deduction for 2018?
- How does this affect out of state shareholders? What is the entity’s requirement for out of state withholding?