The 2017 federal Tax Cuts and Jobs Act placed a cap of $10,000
on the amount of state and local taxes paid that an individual can deduct on their federal taxes. This limitation did not apply to C corporations. Consequently, businesses organized as pass-through entities like S corporations and partnerships pay increased taxes on business profits compared to C corporations because pass-through entities pay taxes on
business profits at the individual (partner or shareholder) level.
For income tax years commencing on or after January 1, 2022, the
bill allows pass-through entities to elect to pay their state income tax at the entity level so that the pass-through entity can claim an unlimited deduction at the federal level of state and local taxes paid.
While this reduces federal taxable income for the pass-through
entity, it does not reduce Colorado taxable income because, under current law, the individual and the partnership are required to add back any state and local taxes deducted at the federal level.
