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IRS Guidance Answers Certain Questions for SPACs on Applicability of Excise Tax, but Some Uncertainty Remains

On December 27, 2022, the IRS released initial guidance on the stock buyback excise tax (“Excise Tax”) enacted as part of the Inflation Reduction Act in August 2022, as discussed in our prior Alert. Notice 2023-2 (the “Notice”) provides interim guidance on which taxpayers may rely pending issuance of regulations, and addresses several ambiguities in the application of the Excise Tax. This Alert discusses the impact of this interim guidance on special purpose acquisition company (“SPAC”) operations and transactions.

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Notice 2020-75: The SALT Cap Does Not Apply to Income Tax Payments Made by Partnerships and S Corporations (in contrast to actual payments made by a partner or S corporation shareholder)

Practices: Tax

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In Notice 2020-75, the Treasury/IRS announced that proposed regulations will be issued to provide certainty that income tax payments made by partnerships and S corporations (as opposed to flowing through the tax to, and with payment then made by, each actual partner or S corp shareholder) are deductible without being subject to the SALT cap that was imposed by the 2017 Tax Cuts and Jobs Act.

The Notice explicitly states that this is true regardless of (i) whether the state gives a full or partial tax credit to a corresponding partner or S corp shareholder and (ii) whether the state law to tax the actual partnership or S corporation applies mandatorily or by election.

The applicability date is for (i) income tax payments  made on or after November 9, 2020 and (ii) also those made before then but for a taxable year ending after December 31, 2017, as long as the corresponding state law was enacted before November 9, 2020.

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