House Bill 2838 was signed into law on July 9, 2021 by Arizona Governor Doug Ducey. The law goes into effect for tax years beginning after Dec. 31, 2021 and will allow partnerships and S corporations to elect to pay income tax at the entity level rather than pass the liability to its owners.
The partners/shareholders of the electing entity will also be granted an Arizona income tax credit for their share of the tax paid by the entity.
This bill was created as a workaround of the state and local tax (SALT) deduction cap created by the Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA limits the SALT deduction to $10,000. This bill shifts the pass-through entity (PTE) tax from the partner/shareholder returns to the entityâ€™s return.
Many states, similar to Arizona, are beginning to pass similar SALT deduction workarounds. Further partner/shareholder analysis may be necessary for certain companies, as the entity election may not be beneficial for all members. This would especially be the case for larger, multi-state companies where nonresident owners may not able to get a credit for taxes paid by the PTE in their resident state.
We Welcome Your Questions
Count on the REDW SALT team to keep you current on the latest tax laws and alert you to tax-saving opportunitiesâ€”and potential pitfalls. For questions or guidance, please contact REDW Principal George Rendziperis, JD, or SALT Manager Jeanna Schenk, CPA.