Authored by Jon Skavlem and Donna Scaffidi
Wisconsin recently enacted a pass-through entity tax allowing S corporations, partnerships and limited liability companies to be taxed at the entity level instead of passing through their income, loss or deductions through to their shareholders, partners or members. The new tax, as established by 2017 Act 368, is elective in nature. It is effective for S corporations beginning with the 2018 tax year and for partnerships and limited liability companies treated as partnerships beginning with the 2019 tax year.
Below are some highlights of Act 368.
Electing pass-through entity tax treatment
- Partnerships: Persons holding more than 50 percent of capital and profits interest on day of election must consent to pay tax at the entity level.
- S corporations: Persons who hold more than 50 percent of shares on day of election must consent to pay tax at the entity level.
- The election is flexible in that it is made on an annual basis. Pass-through entities may opt in or out of the pass-through entity tax regime without limitation or penalty.
- The election must be made on or before the due date or extended due date of the Wisconsin return.
Pass-through entity tax framework
- Persons subject to Wisconsin’s individual income tax will remove K-1 items of income, loss, gain, etc., reported for federal purposes from their federal adjusted gross income in computing their Wisconsin adjusted gross income.
- Corporate tax rate of 7.9 percent applies to an electing pass-through entity’s taxable income (versus 7.65 percent for individuals at the highest marginal income tax rate).
- The character of K-1 income, loss and other items remains the same as if the pass-through entity tax election is not made.
- The apportionment and allocation rules for pass-through entities apply as if the election has not been made.
- The share of income, loss and other K-1 items attributable to resident pass-through entity owners will be 100 percent allocated to Wisconsin.
- The share of income, loss and other K-1 items attributable to nonresident pass-through entity owners will be subject to the normal rules of apportionment and allocation to situs.
- Tax credits available to owners of pass-through entities cannot be claimed against the entity-level tax with the exception noted below.
- The only credit available against the pass-through entity tax is the credit for taxes paid to another state. The credit applies to entity-level tax imposed by other states and to composite income taxes paid by the pass-through entity to other states on behalf of its owners
- There is no carryover of pass-through entity losses.
- The effect of income, gains, losses, etc., on a shareholder’s/partner’s tax basis applies as if the election has not been made.
- Electing pass-through entities are required to make quarterly estimated payments of tax. Pass-through entities are subject to the normal rules in terms of due dates, underpayment of interest, etc.
- The Wisconsin Department of Revenue can assess any unpaid pass-through entity tax to its shareholders, partners or members.
- The Wisconsin Department of Revenue announced the S corporation pass-through entity tax election will be made on Wisconsin Form 5S, the standard corporation income return for Subchapter S corporations. The entity-level tax is to be computed on a new schedule, Form 5S-ET. The department anticipates the updated 2018 Wisconsin S corporation return with the Form 5S-ET will be available on or around July 19, 2019.
- Partnerships: tax years beginning on or after Jan. 1, 2019
- S corporations: tax years beginning on or after Jan. 1, 2018
- There is an exception made for the underpayment of estimated tax penalty for the 2018 tax year.
Please contact your Baker Tilly Tax advisor when considering whether to make the election to pay the Wisconsin pass-through entity tax.
For more information on this topic, or to learn how Baker Tilly state and local tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.