2017 Wisconsin Act 368 (“Act 368”) was signed by Governor Scott Walker on December 14, 2018. Included in Act 368 is a new election which permits S-Corporations, partnerships and LLCs (pass-through entities) to elect to be taxed at the entity level for Wisconsin income tax rather than passing the income through to its owners. The income tax paid at the entity level would be considered a deduction in calculating the entity’s federal taxable income. This election may provide a tax benefit to the owners of the pass-through entity, as the owners’ federal itemized deduction for state and local taxes are limited to $10,000 beginning with the 2018 tax year.
Prior to Act 368 being passed, pass-through entities were not subject to income tax at the entity level. Rather, the entity passed income of the business through to the owners to be reported on their individual income tax returns. Owners paid the appropriate taxes based on their individual state income tax rates.
Effective for tax years beginning on or after January 1, 2018 for S-Corporations and tax years beginning on or after January 1, 2019 for partnerships and LLCs, the pass-through entity may elect to be taxed at the entity level for Wisconsin income taxes. If the election is made, the income will be taxed at a flat rate of 7.9% of the income reportable to Wisconsin. The election is made on an annual basis by the extended due date of the Wisconsin return. More than 50% of the shareholders, partners or members must consent. The benefit of making the election will vary based on the entity’s industry, level of taxable income for the year, and income tax circumstances of the entity’s owners.
If the election is made, the following rules apply:
- Income tax is paid at the entity level at a rate of 7.9%.
- Income tax is due by the un-extended due date of the pass-through entity return.
- Apportionment and allocation of income and deductions apply as if the election has not been made.
- The share of income, deductions and other K-1 items attributable to Wisconsin resident owners will
be 100% allocated to Wisconsin.
- The share of income, deductions and other K-1 items attributable to non-resident owners will be
subject to the normal rules of apportionment and allocation
- The entity is not allowed to claim credits, other than the credit for taxes paid to other states.
- The entity is not allowed to claim a net operating loss deduction.
- The effect on the shareholder, partner or member’s tax basis in the entity applies as if the election
has not been made.
- For tax years beginning on or after January 1, 2019, electing pass-through entities are required to
make quarterly estimated payments of tax, and are subject to underpayment interest.
For S-Corporations making the election for the 2018 tax year, the entity-level tax will be calculated on a new schedule, Form 5S-ET. The Wisconsin Department of Revenue anticipates the form will be available in July 2019. S-Corporations making the 2018 election will need to extend the entity and shareholders’ Wisconsin tax returns until the new form is made available.