New Tax Deduction for Wisconsin Business Owners

A new tax law signed by Governor Scott Walker (2017 Wisconsin Act 368) allows S-Corporations (beginning January 1, 2018) and partnerships and limited liability companies (beginning January 1, 2019) to make an election to pay Wisconsin state income tax at the entity level, instead of on the owners’ personal income tax returns. The ability to pay and deduct Wisconsin state income tax at the entity level is particularly good news because recent changes to the federal Tax Code drastically limits an individual’s ability to deduct state income tax on their personal income tax returns. 

A business that makes the election to pay Wisconsin taxes at the entity level will be taxed at a rate of 7.9% (which exceeds Wisconsin's highest individual income tax rate of 7.65%).  However, the election could significantly reduce your federal tax bill because Wisconsin state income tax paid by the entity is deductible for federal income tax purposes. 

An S-Corporation that files its taxes using the cash method of accounting needs to pay its estimated Wisconsin income taxes from the business before the end of 2018 if it wants to deduct the tax payment on the S-Corporation’s 2018 income tax returns.  Therefore, we recommend all cash method S Corporation owners immediately contact their tax preparer to determine what payments are recommended before the end of the year. 

The election can be made by checking a new box that will be found on 2018 Form 5S and the tax will be computed on a new schedule - Schedule 5S-ET.  However, Schedule 5S-ET is still under development.  S Corporations making the election (and its shareholders) cannot file its 2018 tax returns until the forms are complete (estimated to be July 19, 2019), so plan to extend your 2018 income tax returns if your S-Corporation plans to make the election. 

More information concerning this election will be available in the Wisconsin Department of Revenue’s January 2019 Wisconsin Tax Bulletin. 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.