New Mexico Governor Michelle Lujan Grisham signed HB 102, creating an annual elective entity-level tax for New Mexico pass-through entities on March 8, 2022.
This election, first available for tax years beginning in 2022, allows certain pass-through entities, such as partnerships, limited liability companies (LLCs), and S corporations, to pay New Mexico state income tax at the entity level, rather than requiring each individual owner to pay tax on their share of the pass-through entity income.
Governor Lujan Grisham signed HB 368 on April 5, 2023, which enacted several changes to this election for tax years beginning in 2023 and beyond.
The purpose of this election is to provide relief to small business owners who were negatively impacted by the 2017 federal Tax Cuts and Jobs Act, that limited the amount of state and local tax deductions that could be claimed on federal tax returns to $10,000.
By allowing a pass-through entity to pay state income tax at the entity level, rather than at the individual level, an entity is able claim a full deduction for state tax paid on its federal tax return.
Historically, the state tax due on an entity’s income would have been paid on the individual owners’ tax returns. In most cases, that state tax would not have been deductible on the owners’ federal returns due to the $10,000 cap.