Illinois PTE reporting

[stuebs]

I'm wondering if anyone has looked at the 2021 IL-1065 to see how the pass-through payment works. Does a 2022 payment for 2021 tax liability become a 2022 deduction or should we accrue at 12/31/2021 the expense? It would be a circular computation by my reckoning. Furthermore, it doesn't look like the state tax deduction is an addback aka the Illinois replacement tax.  Therefore, the way I see it, Illinois will be receiving 4.95% less in tax revenue due to the deduction. Am I, as in Shawshank Redemption, being obtuse? Very confusing!

[IRonMaN]

Cash basis taxpayers don't accrue things, but accrual basis taxpayers do.

[stuebs]

Thanks. That's what I'm thinking, so it is a circular calculation (the accrual reduces the tax liability and on and on and on) . And Illinois is shooting itself in the foot by reducing it's tax revenues. Just what they need.

[jeffery sauer]

I am seeing problems with MN PTE tax - similiar issue - cash basis taxpayers who did not pay the PTE tax in 2021 are getting withholding credit in 2021 MN K-1  so it appears Lacerte has work to do on PTE - new to MN and IL - we likely have similiar issue

[stuebs]

Thanks. As a sole practitioner, it's nice to be able to discuss problems like this that are arising. I'm dealing with some pretty large numbers with this PTE deduction and people are looking to me for advice. I understand the concept behind passing these laws, but they haven't thought everything through as to the accounting, reporting, and consequences. I keep looking for guidance from Illinois but so far nothing.

[sjrcpa]

You'll get the credit on the state K-1 but won't get the state tax deduction on the 2021 federal return if you didn't pay it in 2021 (for a cash basis taxpayer).

Yes the software is not ready yet.

[mariegrebe]

The PTE payments needed to be paid by 12/31/21 to be deducted in 2021 even for an accrual based taxpayer.

Payments paid in 2022 for 2021 should be deductible in 2022.  That's our understanding.

We had all our clients pay before 12/31.

[jeffery sauer]

thanks to all for this discussion - let's keep it going.  MN is similiar to IL - first year for PTE - we had people pay in before  12-31-21 to get a deduction for the amount paid in 2021 returns. I see that Lacerte is calculating the tax - I also see the software gives the credit for tax paid - withholding on the MN K-1 - the form shows the withholding credit for those who paid or not so that cannot be right.  watch for that on IL

Here is the big question we are asking in MN - say you have 4 family members who are in a partnership - the partnership owns stocks - the partnership quailfies for PTE - the partnership takes a $500000 gain on stock sale - if it elects the PTE - where does one deduct the PTE on the partnership return?

[Connecto1]

Hello all,

I'm getting some mixed opinions on whether or not an Illinois PTE tax payment paid in 2022 can be accrued by accrual basis pass-thru entities on their 2021 returns.  The consensus is leaning towards no, including on this thread.  Just curious for the source--I tried calling IL and asking directly and I'm not sure they knew what I was talking about. 

[stuebs]

I made the same call last month with the same result. In speaking with another practitioner, he told me that since the election is not actually made until your file the 2021 return (in 2022), there is no liability at  year-end 2021. Kind of makes sense. The tax savings is deferred a year. 

This from a Journal of Accountancy Article dated December 20, 2021:

Crucially, a specified income tax payment is one the PTE "makes ... during a taxable year" in computing itstaxable income "for the taxable year in which the payment is made" (Notice 2020-75, Section 3.02(2)). Eventhough Sec. 164(a) provides that the SALT deduction is for the tax year in which taxes are "paid or accrued,"the more restrictive, literal application of the notice to taxes paid is the safer course, advocates say.
"The plain language of the notice strongly suggests that a PTE tax must be 'paid,'" said Alexander Scott, J.D.,LL.M., a senior manager with AICPA Tax Policy and Advocacy in Washington, D.C. "The prudent course doesappear to be to properly elect, if applicable, and pay by Dec. 31, 2021, depending on the state PTE regime, inorder to benefit from the SALT cap deduction in 2021."

[TaxGirl3]

A colleague received a couple call backs from the IRS chief counsel office.   He was told that the intent of Notice 2020-75 was not to change the timing rules (i.e. cash vs. accrual) and that the regular timing rules would have to be satisfied.  For example, one would need to look at the state statute to determine if the all events test has been satisfied, so if you were to rely on this, you may end up with different answers in different states.