IRS Notice 2020-75

Between TCJA enactment in December 2017 and Notice 2020-75 in November 2020, taxpayers and state legislatures operated in a federal-law vacuum. Connecticut's mandatory pass-through entity tax (Public Act 18-49) took effect for tax year 2018 — meaning Connecticut S-corps and partnerships were paying entity-level state income tax in good faith without IRS confirmation that the federal deduction would be respected at the entity level. Wisconsin (2019), Louisiana (2019), Oklahoma (2019), Rhode Island (2019), and New Jersey (the BAIT, tax year 2020) followed during the same ambiguity window.

The taxpayer's risk position during this period was material. The IRS had two prior signals that cut in the other direction. Notice 2019-12 and the related final regulations under §170 cracked down on charitable-contribution workarounds that some states had attempted as SALT-avoidance schemes (the "charitable-credit" mechanism — paying state-mandated contributions to state-run charitable funds in exchange for state tax credits, then claiming the payment as a charitable contribution federally). The Treasury / IRS message was that they were watching SALT-cap workarounds closely and would push back on structures they viewed as substance-over-form abusive.

Practitioner advice during 2018–2020 generally fell into three camps. The aggressive camp: take the position, do not disclose. The intermediate camp: take the position, attach Form 8275 disclosure to flag the uncertain treatment. The conservative camp: do not claim the entity-level deduction federally; treat the entity-level state tax as a non-deductible distribution and let owners take the SALT-capped personal deduction. The intermediate position was the most common and the safest. Notice 2020-75 effectively validated the intermediate-camp taxpayers retroactively.

No IRS audit-and-deny outcome has been publicly reported for an entity that took the deduction in the 2018–2020 window in reliance on a state PTET statute, and Notice 2020-75 announces an effective date covering specified income tax payments made on or after November 9, 2020, but the notice's reasoning section indicates the IRS's position has always been that such payments are deductible at the entity level. The retroactive risk for pre-Notice payers therefore appears to be effectively zero — but the comfort is sub-regulatory and the historical record matters for taxpayers who carried forward NOLs or basis adjustments from those years.

IRS Notice 2020-75 is a four-section document published in Internal Revenue Bulletin 2020-49 (December 7, 2020). The structure:

• Section 1 — Purpose. States that the notice announces forthcoming proposed regulations under §164 to clarify that Specified Income Tax Payments paid by partnerships and S-corporations are deductible by those entities in computing their non-separately stated taxable income or loss.

• Section 2 — Background. Recounts the §164(b)(6) cap, the state PTET enactments through 2020, and the legal question whether entity-level state tax is properly characterized as a deduction in computing entity-level income or as a separately stated item subject to the owner-level cap.

• Section 3 — Application. The operative provisions. §3.01 defines a Specified Income Tax Payment: an amount paid by a partnership or S-corporation to a state, political subdivision, or the District of Columbia to satisfy the entity's liability for income tax imposed on the entity by the state, where the imposition of and liability for the tax is by the state, not by the owner. §3.02 states that the Specified Income Tax Payment is deductible by the entity in computing its non-separately stated income or loss for the tax year of payment. §3.03 confirms that the deduction is not separately stated and therefore is not subject to §164(b)(6) at the owner level.

• Section 4 — Reliance and effective date. Taxpayers may rely on the notice for Specified Income Tax Payments made on or after November 9, 2020, and for payments made in tax years ending after December 31, 2017, if the payment satisfies the §3.01 definition.

The notice is a Notice — specifically, sub-regulatory guidance published in the Internal Revenue Bulletin, on which taxpayers may rely under standard IRS reliance doctrine and the Code of Federal Regulations published-guidance framework. It is not a Treasury Regulation, not a Revenue Ruling, and not a private letter ruling. Sub-regulatory reliance is binding on the IRS for taxpayers who reasonably and in good faith rely; it is not binding on courts in the same way a Treasury Regulation is.

Section 1 of Notice 2020-75 announced that Treasury and the IRS "intend to issue proposed regulations" implementing the entity-level-deductibility rule. As of mid-2026 those proposed regulations have not been published in the Federal Register. The Notice remains the operative federal guidance.

The absence of proposed regulations is notable for two reasons. First, the timing — five-plus years between announcement and proposal is unusual for a Treasury / IRS guidance package of this fiscal importance. Industry-organization comment letters (AICPA, ABA Tax Section, state-CPA-society task forces) have requested clarifying regulations on multiple sub-issues that the Notice did not address — the treatment of tiered partnerships, the treatment of resident-non-resident allocation disputes, the treatment of mixed corporate / individual owners, and the treatment of state regimes that fall outside the §3.01 definition (state regimes that nominally impose the tax on owners but collect from the entity, for instance). None of those clarifications has been issued.

Second, the political durability of the workaround was always linked to the absence of formal regulation. A future Treasury / IRS could in principle issue proposed regulations narrowing the §3.01 definition — for example, by excluding regimes where the state credit to owners is fully refundable, or where the entity-level tax functions economically as a withholding rather than an entity-level liability. OBBBA July 2025 explicitly preserved the PTET workaround in statute, which substantially reduces the regulatory-narrowing risk. Practitioners nevertheless watch the Treasury Priority Guidance Plan annually for PTET-regulation entries.

[Verify proposed-regulations status against the most recent Treasury Priority Guidance Plan and the Federal Register at each annual content review. The factual claim here is that no proposed regulations have been published as of mid-2026; that is verifiable but time-sensitive.]

The §3.01 definition does heavy lifting. A Specified Income Tax Payment is an amount that meets all of the following requirements:

• Paid by a partnership or S-corporation. Not by an LLC disregarded under §7701 (which has no separate federal-tax existence), not by a sole proprietor, not by a C-corporation (the §164 SALT cap does not apply to C-corps in the first place; entity-level state tax for a C-corp is deductible under §164 generally).

• Paid to a State, a political subdivision of a State, or the District of Columbia. Not to a foreign jurisdiction; not to an Indian tribal government in a non-State capacity (a separate analysis applies).

• Paid in satisfaction of the entity's liability for income tax imposed on the entity by the State. The state law must impose the tax on the entity, not on the owners with the entity acting merely as a withholding agent. This is the structural test that distinguishes a true PTET regime from a composite-withholding regime.

• The State imposition and liability is on the entity. A state regime where the legal incidence of the tax falls on the owners (with the entity collecting and remitting) does not qualify, even if the economics are functionally similar.

What doesn't qualify under §3.01: composite-return payments (the legal incidence is on the owner, the entity is a remitter); withholding payments under non-resident-withholding regimes (same reason); entity-level fees or franchise taxes that are not characterized as income tax (e.g., gross-receipts taxes, the Texas margin tax, certain Ohio commercial activity tax variants — these are not income taxes and the analysis is different and outside Notice 2020-75 entirely); voluntary entity-level contributions to state programs (the post-2017 charitable-credit workarounds Treasury had already shut down).

The practical screen state by state: does the state's PTET statute use language that the tax is "imposed on the [partnership / S-corporation]" and that the partners or shareholders are "entitled to a credit" for their share of the tax paid? If yes, the regime is almost certainly within §3.01. If the statute uses language that the tax is "imposed on the owners" with the entity collecting and remitting, the regime is in §3.01 trouble. Every state grid on this site flags the imposition-of-tax characterization for verified states.

Since November 2020 the IRS has issued no Revenue Procedure, Revenue Ruling, or final Treasury Regulation specifically interpreting Notice 2020-75. A small number of Private Letter Rulings and Chief Counsel Advice memoranda have referenced the Notice in passing — typically in the context of tiered-partnership questions, character-of-income questions on state credits, or basis-tracking questions — but none has been published as a generally applicable interpretive instrument.

The practitioner-relevant adjacent IRS guidance:

• §199A guidance. The QBI deduction regulations (Treasury Regulations §§1.199A-1 through 1.199A-6, finalized in January 2019) define qualified business income to be computed after entity-level deductions. The interaction between PTET (an entity-level deduction) and the QBI base is governed by the §199A regulations, not by Notice 2020-75. The QBI offset on PTET-arbitrage benefit follows from this mechanical interaction.

• §461 economic-performance rules. The accrual-basis timing of PTET deductibility is governed by general §461 rules, not by Notice 2020-75. Treasury Regulations §1.461-4 governs economic performance for state-tax liabilities.

• §170 charitable-contribution workarounds. Treasury Regulations §1.170A-1(h)(3) (finalized August 2019) shut down the pre-Notice charitable-credit SALT workarounds. The §170 regulations are a useful contrast: they show that the IRS does narrow SALT workarounds when it views them as substance-over-form abusive, but it has not done so for PTET.

• State-specific PLRs. New York, California, and Massachusetts have issued multiple state-level rulings on PTET mechanics (Department of Taxation and Finance Technical Memoranda in NY, Franchise Tax Board Notices in CA, Massachusetts Technical Information Releases). These are state-level guidance, not IRS guidance, and they bind only the issuing state. The 50-state grid on this site pins these state rulings where they materially affect election mechanics.

[Caveat: this section is a current-state inventory. Subsequent IRS guidance on PTET could be issued at any time. Verify Treasury Priority Guidance Plan and the Internal Revenue Bulletin at each annual content review before relying on "no further guidance issued" as a current-state representation.]