IRS Permits $10,000 SALT Workaround
Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), taxpayers could deduct real estate taxes and state and local income taxes as itemized deductions on their personal income tax returns (subject to AMT and other limitations). The TCJA capped these State And Local Tax (SALT) deductions at $10,000.
For years, states have been trying to circumvent these restrictions. One plan was to allow taxpayers to treat SALT payments as charitable contributions, which the TCJA did not limit, but the IRS rejected this approach.
Another plan was to impose a state income tax on passthrough entities, such as S Corporations and LLC’s. This tax would be deductible at the Federal level and would serve as a credit at the state level against state income tax for the passthrough owners. This approach indirectly allowed passthrough entity owners to deduct much of the income tax associated with partnership income. Six states have a variation of this passthrough entity tax - CT, LA, NJ, OK, RI and WI.
On November 9, the IRS issued guidance confirming these entity level taxes are permissible, presenting a planning opportunity for passthrough entities in these states and other states likely to move forward with their own passthrough entity tax.