CA PTE paid on pass through capital gain income
View More DetailsS-Corp sold it's assets in 2021 and will be reporting a large capital gain. They want to take advantage of the PTE credit.
- Will the IRS allow a deduction being that the PTE payment is made against separately stated capital gain income?
- If so, is this deduction taken as a reduction of capital gain income or is it a reduction of Box 1 ordinary income ?
- If this is a reduction of capital gain income and the S-Corp makes the payment in 2022, does that show up as capital loss in 2022 subject to the $3,000 limit?
It sure is frustrating having days tick by with some very important questions about the new PTE credit unresolved. I know this is going to turn into a cluster muck for us all in December. But, hell! That's the new freakin' normal for our profession.
Comments
- Will the IRS allow a deduction being that the PTE payment is made against separately stated capital gain income? Yes if it is part of the distributive share, rather than a capital gain on sale of the corp or partnership itself
- If so, is this deduction taken as a reduction of capital gain income or is it a reduction of Box 1 ordinary income ? No, it's a state tax
- If this is a reduction of capital gain income and the S-Corp makes the payment in 2022, does that show up as capital loss in 2022 subject to the $3,000 limit?No it doesn't affect the capital gain at all but the deduction would be in 2022, rather than 2021 if the taxpayer is cash basis.
Thank you, Lynn. I appreciate the responses.
I have a follow up on #2. Based on your response, I take it that this becomes a reduction of the Federal Box 1 ordinary income. Correct?
RE #1, I question whether the PTE tax attributable to the gain on the sale of assets is ultimately deductible by the shareholder of the S corp. Per Notice 2020-75, the criteria for deduction is that it be a "non-separately stated item". Presumably, on the federal K-1 the gain on the asset sale would be reported as a separately stated item as 1231 gain, capital gain, etc. I have a number of questions regarding Notice 2020-75. One being the non-separately stated income requirement. Possible that the intent was to not allow a federal deduction for PTE taxes paid attributable to portfolio income. That seems reasonable but maybe they painted with a overly broad brush. In the original poster's situation, the gain on the sale of the S corps assets is probably business income (see for example 199A treatment). Until the "forthcoming" proposed regulations per Notice 2020-75 or other IRS guidance (hopefully not more FAQs) is issued, I think this is an open item. Lee Shepard has an article in the current Tax Notes that makes the case that the "Non-separately stated income" requirement is challengeable and that the PTE tax should be deductible against almost everything including portfolio income.
In my case, the capital gain is from the sale of intangibles, therefore, not 1231 gain. However, still business assets and not portfolio income.
Lynn's response did give me some comfort, albeit short-lived. Thank you for that post and for muddying the waters. 😉
I am not looking forward to December 🙁
First, here's what the law says: law allows certain pass-through entities to annually elect to pay an elective tax in the amount of 9.3% of the pro rata share or distributive share of the entity's partners, shareholders, or members.
Second, it does reduce the federal k1 income
Agreed re CA treatment that the gain is part of the distributive share and therefore covered for CA purposes as part of the electing entity's and consenting shareholder's PTE liability.
I read original poster's question to be concerned with the federal deductibility of the PTE taxes attributable the capital gain on the sale of intangibles. This is where Notice 2020-75 comes in with its non-separately stated item requirement. I read this requirement as essentially if the PTE taxes are not related to trade or business income and therefore not deductible on page 1 of the 1120S, they may not be deductible. If for example the capital gain on the sale of the intangibles is $1M and the PTE taxes attributable to that is 93k, for federal tax purposes, how is that 93k reported on the K-1? That I think is the open question. If the 1M gain is reported gross and the 93k is reported as state income taxes, on the shareholder's 1040, it that subject to the 10k annual cap on SALT on Sched A?
I have read several articles that interpret the IRS' "non-separately stated" to mean that the deduction is not separately stated on the K-1, i.e. it goes where the state tax deduction always goes -- to Box 1 ordinary income/loss. All the articles I am reading say this. It is only on these message boards where it is being interpreted to refer to types of income.
