New Mexico Makes Changes to their Entity-Level Tax Rules
The annual elective entity-level tax, which was enacted in 2022 for New Mexico passthrough entities, became effective for taxable years beginning on or after January 1, 2022. The tax was designed to allow passthrough entity owners to take advantage of the federal deduction for state and local taxes paid at the entity level, a similar theme witnessed across the country over the past couple of years. As a reminder, the Tax Cuts and Jobs Act of 2017 limited the state and local tax deduction to $10,000.
Just last month, and one year after the enactment of their version of the entity-level tax, New Mexico made certain changes to their regime. These changes are applicable for tax years beginning on or after January 1, 2023:
- Income allocated to a passthrough entity that is an owner of the electing passthrough entity is now ineligible to be included in the calculation.
- Net capital gains that are deductible under NMSA 7-2-34 are excluded from the distributed net income when calculating the entity-level tax if they are properly allocated to eligible owners who are subject to tax under New Mexico tax law.
- Net operating losses may not be included in distributed net income of a passthrough entity when calculating the entity-level tax, but can be carried forward until exhausted.
- Certain requirements for estimated payments of the passthrough entity tax were revised.
- Use of the credit system for entity tax paid on behalf of an owner, instead of an income exemption.
Thanks to Sharla Simpson for authoring this blog post. Our real estate team, which includes Sharla and colleague John Henninger, are ready to help with New Mexico entity-level tax questions.
Source: New Mexico Department of Taxation & Revenue
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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