Dear Passthrough Owner (i.e. S Corporations, Partnerships and LLCs):

In March of this year, the State of New Mexico passed legislation, retroactive to January 1, 2022, that is designed to work around the $10,000 federal cap on deductible state and local tax (SALT). It provides for passthrough entities to pay, and deduct as an expense, New Mexico individual income tax owed by their shareholders. Those payments can then be claimed on the shareholder’s New Mexico income tax return without being subjected to the $10,000 limitation.

What this means for a passthrough owner is that, instead of making New Mexico estimated tax payments, you can start having your business make those payments for you.  Additionally, to maximize the benefit, you can reduce or eliminate altogether the New Mexico income tax being withheld from your paycheck.

You can then eliminate the state deduction with your W-2 payroll, and replace it with payments made directly by the business. However, the payments made by the business must be calculated and paid at the rate of 5.9% of your anticipated K-1 income plus your salary. Any excess will be refunded when you file your return.

This is a somewhat complex change, but the net result will mean that less total tax will be paid.  We will be going through our client list and reaching out to all of you that this rule could potentially benefit.  If you are one of our annual December payroll clients we can manipulate the New Mexico state income tax withheld, but if you are scheduled to make a fourth quarter estimated payment due in January we will be in touch with you about that. The overall goal is to try to have the business pay enough of your New Mexico income tax in advance to avoid paying a balance due with the return next April, leaving New Mexico income tax out of the SALT equation altogether in calculating the amount subject to the $10,000 federal deduction cap.

This will be more manageable in 2023, but for 2022, we will be working to catchup with your current status so that we are ensuring that you receive the most favorable treatment.

One other thing.  As many of you know, we have been working diligently to process the ERC (Employee Retention Credits) for our clients.  We are just about caught up with the list we developed of those that we believe are eligible.  We have attempted to review all of our clients and process the credit for those that qualified (many did not qualify as they had revenue and/or salary increases during the specified period).  If you believe that you should have received the credit and we haven’t contacted you yet, please don’t hesitate to get in touch with us.  For those of you that we have already processed the credit application, we just received this week notice that our first client (credit application filed months ago) received their refund check.  Unfortunately, the IRS is very backed up and we are not expecting these credits to happen quickly.  The sources that we have been consulting think that it could easily be next summer before the IRS has fully processed the applications they are wading through right now.

As always, we appreciate the opportunity to serve our business clients and will always strive to ensure that your business receives the maximum possible tax benefits allowed by the law.

Regards,

 Larry Filener, CPA

 Southwest Accounting Pros, LLC