California, Minnesota Are Latest States To Pass SALT Tax Relief For Pass Through Businesses

According to the S-Corp Association, Minnesota and California lawmakers are the latest to approve legislation that will enable S corporations and partnerships to deduct the full amount of their state and local tax (SALT) payments, just like C corporations can. These signatures bring the number of states that have enacted SALT parity legislation to 17.

California and Minnesota join Colorado, Illinois, Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, New Jersey, Maryland, Alabama, New York, South Carolina, and Arkansas. Several other states 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. In California and Minnesota, for example, this legislation will save small businesses an estimated $1.7 billion each year.