The Tax Cuts and Jobs Act of 2017 generally limited an individual taxpayers’ federal deductibility of state and local taxes (SALT) to $10,000. As a response to this limitation, certain states have passed “workaround” legislation whereby pass-through entities (PTE) (e.g., partnerships, sole proprietorships, S-Corporations and LLCs) may make an election to pay the assessed state tax at the entity level. Since most dealerships are PTEs and these workaround payments may be an option, the question then arises, “How will this impact my Generally Accepted Accounting Principles (GAAP) financial statements”?
PTEs should consider the impact these elections will have on their GAAP financial statements as the impact will be dependent upon each jurisdiction’s rules and how those rules are interpreted. The entities will want to consider whether the tax payments made by the PTE on behalf of its owners should be accounted for as an equity transaction with owners or as a tax expense for financial reporting purposes. If it is determined that the tax is an entity-level tax and within the scope of ASC 740, then the PTE will need to consider the implications related to the accounting treatment and required disclosures for current and deferred taxes. If it is determined that the actual tax liability rests with the owners of the PTE and the PTE is merely paying the tax on their behalf, then it may be considered an equity transaction with owners.
Numerous states are now allowing PTEs to pay the tax at the entity level and each state should be researched to determine proper treatment. Below is one example of the treatment for GAAP reporting based upon a particular assumed fact pattern.
Assume that a qualified PTE may elect to annually pay an elective tax on their qualified net income at a specific rate. The owner(s) of the PTE must provide consent for their pro-rata share of income to be taxed at the entity level. The owner(s) of the PTE must file a state income tax return and are entitled to claim a refundable credit equal to their pro-rata or distributive share of the state income tax paid by the electing PTE. Given that the individual owner is allowed to file and claim the credit and there is no mention in the statute about the liability transferring to the entity, it would appear that the payment is made on behalf of the individual owner and is not considered an entity-level tax subject to ASC 740. As a result, the treatment for GAAP and tax is noted in the table below.
| S-Corporation | Partnership | |
|---|---|---|
| GAAP | Equity Distribution | Equity Distribution |
| Tax | Deductible Tax Expense | Deductible Tax Expense |
| Book/Tax Difference | Yes – Permanent Book/Tax Difference | Yes – Permanent Book/Tax Difference |
If the state statute does not require the owner(s) of the PTE to file a state income tax return or indicates that the liability may not be transferred from the PTE to the owner(s), the tax payment could be considered an entity-level tax subject to ASC 740.
As noted above, each state has its own statutes related to these workarounds and each should be analyzed to determine proper GAAP treatment.
The Dealerships team at FORVIS is equipped to support your dealership by analyzing different state statutes to determine how to properly account for these types of payments in accordance with GAAP.