Contents
- Conformity quagmire: static vs rolling (and why 2025 is different)
- California SB 711: “conformity” plus meaningful decoupling
- Section 174 divergence: state-by-state fractures
- OBBBA: SALT cap reset and the new PTE calculus
- Non-recognition states and entity-level taxes
- Nexus frontier: Wayfair aftermath + P.L. 86-272 erosion
- Apportionment and sourcing: SSF, MBS vs COP, throwback rules
- PTE election mechanics + credit pitfalls
- Shareholder compliance: withholding, composites, trusts
- One-class-of-stock pitfall: uneven tax payments
- 2025 SALT operational checklist
1) Conformity quagmire: static vs rolling (and why 2025 is different)
The report frames 2025 as a “watershed” because state conformity has splintered into a mosaic of rolling states (automatic adoption) and static states (fixed-date), amplified by mid-year federal change from the One Big Beautiful Bill Act (OBBBA). For S corps, conformity isn’t academic—it determines whether pass-through neutrality survives at the state layer or gets replaced with parallel-book compliance. :contentReference[oaicite:2]{index=2}
2) California SB 711: a decade of federal change “absorbed” at once—still with decoupling
California historically conformed to the IRC as of January 1, 2015. The report highlights SB 711’s jump to a January 1, 2025 conformity date for taxable years beginning on or after January 1, 2025—while preserving major nonconformity areas (notably depreciation disparities: California generally does not conform to federal bonus depreciation and maintains its own expensing framework). Result: permanent book/tax basis differences that matter at sale or disposition. :contentReference[oaicite:3]{index=3}
3) Section 174 R&E divergence: a patchwork that can alter K-1 economics
Federal law requires amortization of R&E expenditures under Section 174, increasing near-term taxable income for R&D-heavy S corps. The report details how some states have chosen to decouple (e.g., Alabama allowing current expensing via 2025 legislation effective for 2024+), creating state-only basis tracking that can whipsaw future-year addbacks and deductions. :contentReference[oaicite:4]{index=4}
4) OBBBA: why the PTE election still matters even with a higher SALT cap
The report explains the OBBBA’s 2025 SALT cap increase to $40,000, plus a phase-down for higher-income taxpayers, and why this does not eliminate the usefulness of PTE elections. For many shareholders in high-tax states, personal SALT deductions can remain capped below actual liability, while entity-level SALT deductions (via PTE tax) can remain effectively uncapped and “above the line,” improving federal outcomes and AMT posture. :contentReference[oaicite:5]{index=5}
5) Non-recognition states: where your S election doesn’t save you
Several jurisdictions effectively disregard the federal S election by imposing entity-level taxes (or franchise regimes) that function like corporate taxes. The report spotlights DC (business franchise tax), Tennessee (excise + franchise taxes), Texas (margin tax), and New York City (GCT on S corps), as well as states with business profits/enterprise taxes that apply at the entity level. The practical lesson: “pass-through” is a federal label, not a guarantee. :contentReference[oaicite:6]{index=6}
6) Nexus frontier: P.L. 86-272 is being redesigned by internet behavior
The report describes 2025 as the era of the “cookie audit.” Under the MTC’s revised P.L. 86-272 interpretation, internet activities like non-solicitation cookies, post-sale chat support, remote fixes, and certain web-based recruiting can exceed “mere solicitation,” eroding 86-272 immunity and creating net-income-tax nexus in states adopting the new model (with high-stakes litigation outcomes varying by state). :contentReference[oaicite:7]{index=7}
Operational implication
Your SALT footprint now depends on web product choices (analytics cookies, support chat, remote updates). Tax teams increasingly need IT/security to classify cookies by function to defend 86-272 positions. :contentReference[oaicite:8]{index=8}
7) Apportionment and sourcing: SSF, MBS vs COP, and the throwback trap
Once nexus exists, apportionment determines the size of the tax bill. The report highlights the shift to Single Sales Factor (SSF) and the dominance of Market-Based Sourcing (MBS) for services—while noting COP states still exist and can create “nowhere income” planning outcomes when paired with non-throwback origin states. It also flags throwback rules (e.g., California/Illinois) that pull “protected” sales back into the origin state’s tax base. :contentReference[oaicite:9]{index=9}
8) PTE elections: powerful—but mechanics and credits decide who wins
The report treats PTE tax elections as a mature planning instrument—not just a TCJA workaround. It explains real-world frictions: estimated-payment deadlines that can invalidate elections (California’s payment timing is highlighted), and the “other state tax credit” (OSTC) system where resident states may or may not grant credits for entity-paid taxes. It also notes that gross receipts taxes (e.g., WA B&O, TX margin tax) typically aren’t “net income taxes” for OSTC purposes. :contentReference[oaicite:10]{index=10}
10) One-class-of-stock risk: SALT payments can create “unequal distributions”
A subtle but serious federal risk arises when an S corp pays state tax on behalf of some shareholders (PTE, withholding, composite) but not others. If those payments aren’t treated as distributions (and equalized pro rata), the corporation can inadvertently violate the one-class-of-stock requirement—an S termination event. The report recommends governance language and distribution mechanics that treat shareholder-specific tax payments as distributions and true-up cash accordingly. :contentReference[oaicite:12]{index=12}
2025 SALT operational checklist
- • Build a conformity matrix (174, depreciation/179/bonus, OBBBA-driven changes) by filing state. :contentReference[oaicite:13]{index=13}
- • Run a “cookie audit”: classify cookies/chat/support tools by function in MTC-adopting states. :contentReference[oaicite:14]{index=14}
- • Map taxes that ignore profitability (WA B&O, TX margin, OH/OR CAT) into cash-flow forecasts. :contentReference[oaicite:15]{index=15}
- • Recompute PTE election value under the $40k cap + phase-down (don’t assume it’s automatic). :contentReference[oaicite:16]{index=16}
- • Validate OSTC creditability and “reverse credit” rules for your shareholder residence states. :contentReference[oaicite:17]{index=17}
- • Review sourcing method per state (MBS vs COP), and model throwback exposure from origin states. :contentReference[oaicite:18]{index=18}
- • Standardize nonresident compliance: withholding vs composite participation (especially for trusts). :contentReference[oaicite:19]{index=19}
- • Protect S status: treat entity-paid taxes as distributions and true-up to preserve one-class-of-stock. :contentReference[oaicite:20]{index=20}