Another State Adopts SALT Tax Relief For Pass Through Businesses

Good news from MSCI’s partners at the S-Corp Association: New York has become the tenth state to adopt reform legislation that will preserve the federal State and Local Tax (SALT) deduction for small businesses organized as pass-through entities.

New York joins Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, New Jersey, Maryland, Alabama, and Arkansas. A dozen other states, including Illinois and Georgia, are actively considering similar legislation.

As Connecting the Dots has explained, the 2017 federal tax reform law preserved the SALT deduction for C corporations, but denied it to millions of businesses organized as pass-throughs if they pay those taxes at the owner level. (Businesses remain able to deduct taxes that are paid at the entity level.) According to the Joint Committee on Taxation, the tax increase from the loss of the SALT deduction is significantly bigger than the benefit of the 20 percent pass-through deduction.

The S-Corp Association has been working with state lawmakers to adopt model legislation that would:

• Change the incidence of tax on pass-through business income from the owner to the entity, making those taxes deductible at the federal level;
• Give those owners a credit for the taxes paid at the entity level; and
• Recognize the value of similar credits paid by other states to pass-through owners.

According to the S-Corp Association, billions of dollars are at stake. The Michigan Department of Taxation, where a SALT parity bill is under consideration, estimates the legislation would save S corporations and partnerships in that state approximately $190 million every year.