Tax News Update - 3rd Edition
Wall Street Journal: States Help Business Owners Save Big on Federal Taxes with State and Local Tax Cap Workarounds
Business owners are saving nearly $10 billion annually in federal taxes courtesy of state laws that help businesses circumvent the $10,000 limitation on state and local tax (SALT) deductions, according to an article in the Wall Street Journal.
The workaround strategy converts business owners' personal income taxes into deductible business taxes that escape the SALT tax limitation. Workers who earn wages are not generally able to take advantage of this strategy.
The $10,000 cap on the deduction of state and local taxes was included as part of the Tax Cut and Jobs Act of 2017. Although the IRS and the Treasury Department have blocked several attempted strategies to bypass the cap, almost half the states have created a workaround the pass-through businesses such as partnerships, S corporations and some Limited Liability Companies.
The IRS issued Notice 2020-75 in November 2020, giving the go-ahead for certain businesses to take this deduction.
How it works
While the details of the SALT workaround differs from state to state, the end result of allowing business owners to deduct state and local taxes is the same.
The starting point of the workaround is a state tax imposed at the pass-through entity level. The owners of the pass-through entity can then deduct their share of these state taxes to reduce their federal taxable income if they itemize deductions.
The pass-through entity owners then receive a state tax credit or a deduction to zero out the initially-imposed state tax.
States and localities with enacted or proposed pass-through entity level tax
With Enacted Laws (27 states, 1 locality): Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Maryland, Minnesota, Mississippi, North Carolina, New Jersey, New Mexico, New York, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, Wisconsin, New York City
With Proposed Bills (4 states): Iowa, Missouri, Ohio, Pennsylvania
States With Owner-Level Income Tax But No Current Workaround (10): Delaware, Hawaii, Indiana, Kentucky, Maine, Montana, Nebraska, North Dakota, Vermont, West Virginia
States With No Owner-Level Income Tax (9): Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
Source: American Institute of Certified Public Accountants, States with adopted or proposed PTE tax map, May 23, 2022
Be cautious when considering this deduction
While SALT workaround have the potential to create a large federal tax benefit for business owners, this workaround will not be appropriate for all business owners. Please call if you have questions about how this state tax workaround may apply to your situation.
Proposed Tax Legislation
The following is an overview of several recent tax proposals discussed or introduced in Congress over the past several weeks. It is important that you not treat these proposals as passed legislation. Many hurdles remain before any of these legislative ideas become law. In the meantime, it is useful to see what types of tax laws may be affecting you in the future.
DELIVER Act of 2022 (House of Representatives Bill 7872 and Senate Bill 4291): This bill, introduced May 24, proposes to amend the Internal Revenue Code of 1986 to increase the standard charitable mileage rate for delivery of meals to elderly, disabled, frail, and at-risk individuals.
People Over Petroleum Act (House of Representatives Bill 7871): This bill, introduced May 24, proposes to amend the Internal Revenue Code of 1986 to repeal fossil fuel subsidies for oil companies and to establish gas price rebates to individuals for 2022.
Rural IRS Accountability Act (House of Representatives Bill 7844): This bill, introduced May 19, proposes to amend the Internal Revenue Code of 1986 to improve tax filing efforts in rural areas.
Public Safety Officer Health Improvement Act of 2022 (Senate Bill 4267): This bill, introduced May 19, proposes to amend the Internal Revenue Code of 1986 to create a tax credit for qualified health insurance premiums of eligible retired public safety officers.
Inflation-Adjusted Education Investment Act (Senate Bill 4265): This bill, introduced May 19, proposes to amend the Internal Revenue Code of 1986 to increase and provide an inflation adjustment for the limitation on distributions from qualified tuition programs that may be used for elementary and secondary tuition.
HEALTH Act (House of Representatives Bill 7831): This bill, introduced May 18, proposes to amend the Internal Revenue Code of 1986 to provide a deduction for certain charity care furnished by physicians.
Bob von Schwedler Permanent Health Coverage Tax Credit Expansion Act (House of Representatives Bill 7823): This bill, introduced May 18, proposes to amend the Internal Revenue Code of 1986 to amend the Internal Revenue Code of 1986 to make the health coverage tax credit permanent.
The above are proposals. There are many steps each bill must go through before they are signed into law. Information retrieved from: GovTrack.us https://www.govtrack.us/congress/bills/subjects/taxation/6342