Cecilie Arcurs | Getty Images
A growing number of states are offering pass-through business owners a workaround for the US $ 10,000 state and local tax deduction limit known as SALT.
As a controversial part of the 2017 Republican tax reform, the SALT depreciation cap is costly to applicants who list deductions and cannot claim more than $ 10,000 in property and state income taxes.
The limit has been a strain on those in high-tax countries like California, New Jersey, and New York. Despite pushing for the law to be repealed, President Joe Biden did not include the measure in his proposals.
More from Personal Finance:
The Senate’s proposal would revise the tax relief for transit companies
Inheriting an individual retirement account? How to avoid a tax bomb
Consider these tax steps before paying for college
Although the IRS and Treasury have blocked some individual strategies for bypassing the cap, some states have put in place a workaround for pass-through businesses like partnerships, suburban companies, and some LLCs.
The IRS issued state-level guidance on these tactics in November 2020 and given certain companies the green light.
More than a dozen states have passed laws to approve the workaround, including Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin, according to the American Institute of CPAs.
Illinois, Massachusetts, Michigan, North Carolina, Oregon, and Pennsylvania have laws pending, the AICPA said.
While the maneuver may offer tax savings for some business owners, it may not be the right move in all cases, say financial experts.
“The devil is in the details,” said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Financial Services in Somerset, New Jersey.
This is how the tax on transit companies works
Most U.S. corporations are run-through companies whose profits go into owners’ individual tax returns.
The new bypass typically includes a state levy on these companies that allows the company to cover some of the owner’s state income taxes.
The transit company usually pays the fee. But while some states allow corporate-level deductions, others offer credit for taxes paid.
The numbers have to be laid out and everyone has a different situation.
CEO of Unlimited Financial Services
For example, California Governor Gavin Newsom signed law last week that allows some companies to pay an additional 9.3% levy on each owner’s share of the company’s net income.
Owners who participate will then be able to claim 9.3% tax credit on their California tax return.
“You have effectively prepaid your state taxes on your relay income,” said Perry Ghilarducci, CPA and partner at Avaunt Ltd. CPAs & Consultants in Sacramento, California.
Not suitable for all businesses
The workarounds may seem like a welcome relief for business owners who spend tens of thousands of dollars in property taxes and state income taxes each year.
However, it’s important to crack the numbers before taking any steps, Mohammed said.
A business owner needs to review their taxes on a corporate and personal level, he said. For example, if no deductions are listed, the benefits may not be that significant.
In addition, a business owner in a lower tax bracket may overpay his state dues for the year, Ghilarducci said.
“The numbers have to be established and everyone has a different situation,” added Mohammed.