The Indiana Senate passed Senate Bill 2: Taxation of Pass-Through Entities (SB2) on Feb 6. It has been referred to the Indiana House and is expected to move quickly.
This bill is similar to laws other states have passed in recent years. It is effectively a work-around the federal deduction cap on state taxes individual taxpayers are subject to on their Federal Form 1040 Schedule A, Itemized Deductions. SB2 will allow pass through entities (S-corps and tax partnerships) to pay state taxes rather than the entity owners and deduct the payment of these taxes without a cap.
WHAT DOES THIS MEAN?
The result of this will for many result in a new tax deduction and ultimately federal income tax savings. However, each circumstance is different and the value and benefit will vary from taxpayer to taxpayer and business to business.
It will also change the way state estimated payments are made. Going forward, to take advantage of the benefit, the company will pay your state income tax payments rather than the individual owners.
TIMING CHALLENGES
This law if passed as currently written is to be retroactive to 2022. However, since it is not even passed yet, it will create some timing challenges for the 2022 filing season. The state will have to create forms, create regulations, and provide guidance on how they want this implemented. As a result, to take advantage of this for the 2022 tax year, taxpayers will either have to extend both their business and their personal income tax returns for the 2022 tax year or plan to file now and then file amendments later to take advantage of the new law.
OUR ADVICE
This new law if passed will certainly be a benefit to many of you. We are reviewing this as we prepare your 2022 income taxes for applicability and impact. We will be providing you a recommendation on 2022 steps as we near conclusion of your filing. In addition, as we move into 2023 and our planning meetings, we will be assessing the long term impact and any possible adjustments we should make to your situation. We urge you to continue providing your information to us timely as more information allows us to better plan and prepare for 2022 and beyond.
If you have any questions about this please let us know.