New guidance issued on Wisconsin’s pass-through entity tax

On Jan. 25, 2019, the Wisconsin Department of Revenue (WDOR) issued frequently asked questions (FAQ) related to the Wisconsin pass-through entity tax created by 2018 Act 368. There were notable clarifications to earlier guidance.

As a reminder, the pass-through election can be taken by S corporations, effective for taxable years beginning on or after Jan. 1, 2018. Partnerships and limited liability companies may pursue the election effective for taxable years beginning on or after Jan. 1, 2019.

1. Election – The election to be taxed at the pass-through entity level must be made annually on or before the extended due date of the Wisconsin Form 5S. This election can be revoked by filing an amended Form 5S on or before the extended due date. Please note, there is no official form to make a pass-through entity tax election. Schedule 5S-ET, Entity-Level Tax Computation, is expected to be ready July 19, 2019. Please be aware Form 5E, Election by an S Corporation Not Be Treated as a Tax-Option Corporation, should not be completed. This election is fundamentally separate from the election made on Schedule 5S-ET.
2. Shareholder notification – An electing S corporation should check Box #3 in Part B of Schedule 5K-1 to indicate to the shareholder that the election has been made. While the WDOR is not requiring signatures of consent on the return, the electing S corporation should document that consent is received from shareholders who hold an aggregate of more than 50 percent of the shares. The WDOR is not planning on releasing an official “consent” form. Electing S corporations should have in their files contemporaneous documentary evidence that a timely, valid pass-through entity election has been made to meet an auditor’s standard of proof. This could entail a resolution entered into the board of director minutes detailing the outcome of the consent vote and/or written, signed consents from the requisite number of shareholders. Other forms, e.g., electronic consents, may be acceptable but we recommend that electing S corporations and their shareholders err on the side of caution in supporting their annual consent election.
3. Estimated payments – The WDOR will not apply payments made by individual shareholders to the liability of the electing S corporation. The WDOR will move nonresident PW-1 payments to entity-level income tax payments if the payments were made by an electing S corporation. A written request to move payments may be submitted through email to DORIncomePassThroughComposite@wisconsin.gov. The electing S corporation must make an extension payment using 2018 Form Corp-ES by March 15, 2019. Underpayment interest and penalties associated with the entity-level tax liability of an electing S corporation will be waived for the 2018 tax year only (as long as the extension payment is timely made). In its FAQ, the WDOR is instructing individual shareholders of electing S corporations wait until they receive a Schedule 5K-1 to file an individual return and be refunded tax.
4. Long-term capital gains

Officials from the WDOR indicated it has not sought guidance from the IRS as to whether or not the “Wisconsin workaround” will be permitted.

View a full list of the common questions and WDOR guidance. 

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.