SALT Deductions Get a Boost From the IRS

If you are one of the people who pays more than $10,000 per year in state and local taxes, then you were probably dismayed when the Tax Cuts and Jobs Act (TCaJA) eroded the State and Local Tax (SALT) deduction, limiting it to only the first $10,000 in taxes. For some people, the rate-based tax cuts were more than offset by the loss of a large part of the SALT deduction.

The IRS has announced a plan to issue regulations that may help alleviate the SALT deduction issue for S-corporation owners. The plan was announced in IRS Notice 2020-75.

The proposal would permit state laws that allow the taxes to be paid at the entity level, rather than at the pass-through personal level.

State income tax codes typically allocate business income from S-Corporations and other pass-through firms to the owners’ individual income tax returns (the income “passes-through” to the individual). An entity-level tax would assess state tax liability directly on the firm before the income passes to the owners. Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have all adopted entity-level taxes that offer credits against the owners’ personal tax liability (thus shifting the tax to the business while offering a credit to the individual so that the individual does not pay the tax already paid by the business). This state tax is deductible by the entity so it returns the taxpayer to a tax situation that is equivalent to the taxpayer’s pre-TCaJA situation relative to the SALT-deduction.

In IRS Notice 2020-75, the IRS announced plans to issue regulations to effect this change. The proposed regulations have not yet been issued as of today. It is unclear whether a President Biden would allow such regulations to proceed to a final rule.

We will continue to monitor this development and assess how it may affect our members.