State and Local Tax Deduction Impacts S Corporations
The new tax bill signed in December includes a dramatic reduction to the itemized deduction for state and local taxes. Previously, all state and local income and real estate taxes could be deducted by taxpayers (though the benefit of these deductions could be limited for shareholders paying the personal alternative minimum tax). Beginning in 2018, the deduction for state and local taxes will be capped at $10,000.
Since S Corporation shareholders pay state and local taxes on behalf of the corporation, the state tax deductions claimed by higher income S Corporation shareholders in certain states are very significant. The cap on this federal deduction effectively increases the overall taxes paid by these shareholders.
In contrast, C Corporations are able to fully deduct all state and local income taxes paid by the corporation. In certain states with high personal tax rates, this may be an additional factor to consider when determining whether your institution will want to remain an S Corporation.
Banks that remain S Corporations post tax reform will also want to make sure that they fully account for the additional state income taxes shareholders will pay as part of their quarterly tax distribution calculations.
CLA is here to help. Our financial institution team can assist you in analyzing how the tax reform changes will impact your institution and its shareholders.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
Comments are closed.