Included among the bills just passed by the Wisconsin legislature was new 2017 Wisconsin Act 368, This Act contains provisions, which were sponsored and championed by Sen. Howard Marklein, a certified public accountant, that allow pass-through entities (S corporations, as well as partnerships, limited liability companies and other entities treated as partnerships under the Internal Revenue Code) to elect to be taxed at the entity level.

Why would people want to do that? Because under the Tax Cuts and Jobs Act, the deduction of state income, property and other taxes imposed at the individual level is limited to a maximum of $10,000 per return, but taxes imposed on pass-through entities are deductible at the entity level and therefore reduce income passed through to the shareholders or other owners, thereby effectively making those taxes deductible. I.R.C. §164(b)(6); H.R. Rep. No. 115-466, at 260 n.172 (2017) (Conf. Rep.) (“[T]axes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.”).

Net Savings

The economics work like this. Taxpayers subject to the top individual income tax rate of 7.65% here in Wisconsin applicable to taxable income over $336,200 on a joint return and $168,100 on a separate return for calendar year 2018 are likely to have property taxes and income taxes on their non-pass-through income of at least $10,000. Thus, the state income taxes that they pay on their income from pass-through entities are effectively nondeductible. These new provisions allow pass-through entities to elect to be taxed at the entity level at a flat rate of 7.9% (the Wisconsin corporate income tax rate). Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a). You probably see where this is going. A nondeductible 7.65% tax costs precisely that, namely 7.65%. However, a federal top-bracket owner of a pass-through entity that qualifies for the new 20% (federal only) deduction for qualified business income under section 199A of the Internal Revenue Code is subject to a top federal rate of 29.6% [(1 – 20%) X 37% = 29.6%]). This means that a deductible 7.9% tax costs only a net 5.56% [(1 – 29.6%) X 7.9% = 5.56%] after you take into account the deduction for state income taxes at the entity level. If, for whatever reason, the business owner is not entitled to the 20% 199A deduction, the overall net tax cost of the 7.9% state income tax actually goes down to approximately 4.98% [(1 – 37%) X 7.9%]. Bottom line: Profitable Wisconsin business owners could achieve after-tax savings of approximately 2.09% (or almost 2.7% for businesses that do not qualify for the section 199A deduction).

Tax Treatment

The actual tax effects of this election are specified in Act 368. As noted above, a flat tax of 7.9% is imposed at the entity level. Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a). Income, losses and deductions that would otherwise be passed through to S corporation and partnership owners are excluded for purposes of determining their taxable income at the individual level for Wisconsin. Wis. Stat. §§ 71.05(10)(dm), 71.36(1), 71.365(4m)(b), 71.21(6)(b). However, the basis in their respective ownership interests (stock in the case of S corporations and partnership interests for noncorporate entities) are still increased and decreased to reflect income or loss at the entity level, the same as they would be if no election had been made. Wis. Stat. §§ 71.365(1)(a), 71.21(6)(d)4. And the distribution of “earnings and profits” accumulated during years in which this election is in effect would not be treated as dividends for Wisconsin (or federal) tax purposes. Wis. Stat. § 71.05(6)(a)14.

Net income and situs of income for entities making this election is computed and determined as if no election had been made. Wis. Stat. §§ 71.365(4m)(d)1., 71.21(6)(a). It is just taxed at the entity level, rather than at the owner level. Wis. Stat. §§ 71.365(4m)(b), 71.21(6)(b). Thus, an S corporation or partnership owned 100% by Wisconsin resident shareholders or partners would be taxed on 100% of its entire net income, even if some of that net income was apportioned or otherwise allocated out-of-state. However, for example, an S corporation which has two shareholders, a resident shareholder owning 60% of its stock and a nonresident shareholder owning the other 40% of its stock, and which has 90% of its income apportioned or allocated out-of-state would pay tax only on 64% of its income (60% X 100% + 40% X 10% = 60% + 4% = 64%).

Since the net income of an S corporation or tax partnership electing under these new provisions will be taxed at the entity level, the net income or franchise taxes paid by the entity in other states is eligible for the out-of-state tax credit, along with individual income taxes paid by the entity on behalf of its Wisconsin resident individual, estate and trust shareholders or partners on composite returns filed in other states. Wis. Stat. § 71.07(7)(b)3. Similarly to individuals, this credit is subject to an overall cap based upon the 7.9% tax rate imposed on the corresponding income. Wis. Stat. §§ 71.07(7)(c). Significantly, such income, franchise and composite taxes paid by electing S corporations or partnerships should not qualify for credit at the individual shareholder or partner level anyway, because it will now not be considered income to them for Wisconsin tax purposes, and only resident individuals, estates or trusts are eligible for such credits in the first instance. Wis. Stat. §§ 71.07(7)(b)1., (c).


Although the election is likely to be quite beneficial for numerous Wisconsin businesses, there are circumstances where it might not be advisable. For example, S corporations and tax partnerships where a substantial amount of the pass-through income is subject to Wisconsin tax at substantially less than the top 7.65% rate might not benefit enough from the deductibility in order to offset the cost of having to pay tax at the higher 7.9% rate.

Similarly, it may not be advisable where S corporations, partnerships and/or their respective shareholders and partners are eligible for credits, such as the manufacturing and agriculture credit, that reduce their effective Wisconsin tax rate. See, e.g., Wis. Stat. § 71.07(5n). The only credits allowed to S corporations and partnerships electing under these new provisions are the credits for franchise, income and composite taxes described above. Wis. Stat. §§ 71.365(4m)(d)2., 71.21(6)(d)3.

Also, S corporations and partnerships with substantial out-of-state owners might not benefit if those owners are not allowed a corresponding exclusion or credit at the individual level in their home state for the income tax that is now being paid at the entity level here in Wisconsin.

The election would also typically not be advisable for S corporations and partnerships experiencing losses, because there would be no deductible state taxes to begin with and such losses would effectively be wasted. Wis. Stat. §§ 71.05(10)(dm), 71.365(4m)(b), (d)3., 71.21(6)(b), (d)2.

However, as explained below, this election may be made on or before the due date or extended due date of the relevant S corporation or partnership return. Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a). Thus, taxpayers and their accountants will have the opportunity to determine whether the election is beneficial and worth the extra compliance costs before committing to this regime. Taxpayers can even revoke the election within this same timeframe if they subsequently change their mind. Wis. Stat. §§ 71.365(4m)(c), 71.21(6)(c).


The election procedure itself mirrors the existing election for S corporations to opt out of “tax-option” status entirely for Wisconsin purposes only. Compare Wis. Stat. §§ 71.365(4)(a), with Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a). It must be made each year, and will presumably be in some form of check-off or attachment on the Wisconsin return. Just as with the existing section 71.365(4)(a) “opt out” election, this new election will also require the consent of persons owning more than 50% of the shares for an S corporation and more than 50% of the capital and profits for a tax partnership, though any such consent should be able to cover some or all future years.

The new election is available for S corporations starting with taxable years beginning on or after January 1, 2018, i.e., this year. Partnerships will not be eligible until next year. 2017 Wisconsin Act 368 § 21(1). Thus, some year-end tax planning for S corporations now may be appropriate, but not essential given the optional nature of this relief.


Lawyers and accountants should be apprising their S corporation and tax partnership clients of this new opportunity. For profitable businesses, the after-tax savings could be significant. S corporations will be eligible right away for 2018 taxable years; partnerships will not be eligible until next year.