Relief from $10,000 SALT Limitation on
the Horizon for Certain Small Business Owners
The implementation of the Tax Cuts and Jobs Act in 2017 included a limitation of $10,000 on the total deduction for state and local income taxes (SALT) and real estate taxes. Many states and localities responded to this limitation by creating workarounds specifically for the owners of small businesses, such as partnerships and S corporations.
For example, in 2018 Connecticut implemented a pass-through entity tax imposed on partnerships and S Corporations at the maximum individual marginal rate of 7%. The partners and shareholders were then entitled to a credit against their Connecticut individual tax liability for that same amount.
In 2020, New Jersey introduced the Pass-Through Business Alternative Income Tax Act, which established an elective entity-level alternative income tax to be paid by partnerships and S corporations. Similar to Connecticut’s proposal, the partner or shareholder would be entitled to a refundable credit on their state individual income tax return for their pro-rata share of the entity level tax paid. New Jersey also specifically allows a credit for similar taxes paid to other states.
Currently, the following states had enacted some form of pass-through entity tax: Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin. Only Connecticut’s is mandatory, all of the others are elective and revocable.
The following states have proposed, but not yet enacted, a pass-through entity tax: Michigan, Minnesota, and New York.
The IRS is proposing new regulations that would clarify that other similar state and local taxes should be treated similarly as deductions at the entity level and, therefore, allowable as a reduction of the partner’s or shareholder’s share of the entity’s net income. Proposed Regulations have no legal authority until adopted as either Temporary or Permanent Regulations. They serve merely as guidance as to the direction in which the Treasury Department is headed.
We will continue to monitor the regulation until it is passed as law. Small business owners, partners and shareholders should consult with their tax advisors about the options available to them in the various states in which they operate.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.