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On December 14, 2018, Wisconsin Governor Scott Walker signed Senate Bill 883 (SB 883). The legislation provides for an election for pass-through entities, including partnerships, limited liability companies and tax-option corporations (e.g., S corporations) (collectively, PTEs) to be taxed at the entity level, with the PTE owners allowed an exclusion for the investors' distributive share of income subject to the new PTE tax.

Under current Wisconsin law, PTEs are not subject to entity-level income/franchise taxes. The PTE's income, loss and apportionment factors flow through to the owners. SB 883 amends Wisconsin statutes to allow a PTE to elect to be taxed at the entity level at the corporate tax rate of 7.9%. If a PTE elects to be taxed at the entity level, SB 883 also provides an income exclusion for the owners of the PTE. The adjusted basis in a PTE owner's interest in the PTE is determined as if the election were not made (i.e., basis is still increased or decreased to reflect income or loss at the entity level as if the election were not made). Further, the PTE owner cannot claim a credit for taxes paid by the electing PTE. If the election is made, the PTE will compute and situs its income as if it the election were not made and the PTE will compute and situs income using the rules for individuals.

Persons owning more than 50% of the PTE must consent to the election and any revocation thereof. If the election is made, the PTE may not claim losses or tax credits except for the credit for taxes paid to other states. If the PTE fails to pay any taxes due, the Wisconsin Department of Revenue may collect the tax from the PTE's owners. This election may be made for tax years beginning in 2018 for tax-option corporations and 2019 for all other pass-through entities. The election must be made by the due date, including extensions, of the return.

Implications

SB 883 appears to be a workaround to the federal $10,000 limit on the deduction for state and local tax paid (the SALT deduction cap) that was enacted as part of the federal Tax Cuts and Jobs Act (P.L. 115-97). Wisconsin follows Connecticut to become the second state to adopt the PTE workaround to the SALT deduction cap. As opposed to an income tax credit, the income exclusion may put the workaround in a better position to withstand federal challenge.

The election appears to be intended to primarily benefit PTE owners who are Wisconsin residents and whose PTE income is being taxed at the top Wisconsin marginal individual rate of 7.65%. PTEs with out-of-state owners might not benefit from the election if they are not allowed a credit in their home state for the Wisconsin tax that would be paid at the entity level if the election were made. Taxpayers should carefully consider their facts and circumstances to determine whether the election is beneficial.

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