I am a California resident who made a pass through entity tax election. When I enter the PTE tax deduction amount from box 13w of my Federal K-1 into TurboTax, it does not change my federal tax liability, it only changes the state tax liability on my California state return. Shouldn’t my federal tax liability be reduced by the amount of the deduction from box 13W?
(In TurboTax I am entering the amount in the Code W detail page, Taxes and State Income Tax Withheld section, selecting California from the drop down, and entering the amount in the State Income Tax Withheld box.)
Someone else will have to answer as to the proper treatment for California purposes.
I refer you to this thread
some key points
In November 2020 the IRS released Notice 2020-75, which provided that proposed regulations would be forthcoming, while also clarifying that SALT imposed on and paid by a partnership or S corporation, referred to as specified income tax payments (SITPs), would be allowed as a deduction by the partnership or S corporation in computing its non–separately stated federal taxable income or loss for the tax year of payment. The notice allowed partners and S corporation shareholders to receive a federal deduction for SITPs, resulting in a benefit similar to what was provided to PTE owners prior to the TCJA’s $10,000 SALT limitation.
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SITPs are deemed a Sec. 164 deduction and not a Sec. 212 expense, i.e., an expense associated with the production of income. The provisions of Sec. 212 were not intended in any way to disallow expenses that would otherwise be allowable but instead were enacted to allow for additional itemized deductions that wouldn’t otherwise be allowable as a trade or business expense.9This is clearly reflected when an individual receiving investment income would claim a federal SALT itemized deduction for state income taxes paid and not be subject to Sec. 212. Therefore, an expense does not automatically become nondeductible just because it is derived from a Sec. 212 activity.
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in my opinion, as a section 164 deduction the SITP should have been deducted in arriving at line 1,2, or 3 of part III of the k-1 and not reflected on 13W.
the work around is to enter it under the 13w
then when you get to the worksheet that says enter code W detail you check off nonpassive deduction to be reported on schedule E page 2
then enter description I would use SITP and the amount this will then result in an above the line deduction.
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However, this is not proper if the income is passive. the only work around I could find would be to create a 2nd k-1 in the same name as the partnership but after it add - SITP and enter it as a negative number on the same line as the original k-1.