SALT Cap Workaround for Pass Through Entities

The Tax Cuts and Jobs Act of 2017 (tax reform) was designed to make the tax code easier to navigate and reduce taxes on American businesses allowing them to be more competitive. Many of the changes were well received including the reduction of the corporate tax rate to 21%, a new 20% deduction for pass-through entities, and an increase in Section 179d expensing. However, there were other changes not well received by Atlanta businesses including the elimination of the entertainment expense deduction, limitation on business meal expense deductions, and implementation of a $10,000 cap on the deduction of state and local taxes (SALT) for pass-through entities. The Cap applied to individuals, not corporations, but since pass-through entity owners (S-corporations, partnerships, and LLCs) pay taxes on an individual level suddenly the cap limited the deduction opportunity. To address the problem, the IRS issued Notice 2020-75 was issued on November 9^th, which provides guidance and immediate relief to impacted taxpayers.

SALT Cap Relief

The Notice now allows pass-through business entities that pay income taxes to deduct the whole amount, rather than having the owners pay the tax at the individual level. The amount which can be deducted is not limited by tax reform’s $10,000 cap on an individual’s SALT deduction. The change essentially offers a workaround to the cap which has been a thorn in the side of many business taxpayers since tax reform was passed.

The changes outlined in the Notice are effective for entity level tax payments made on or after November 9, 2020. In addition, the changes also apply to qualifying income tax payments made after 2017 and prior to the November 9^th rule change.

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The changes outlined in the recent Notice provide welcome relief to pass-through entity taxpayers. Not only will it undo the limitation on future tax payments, but also allows for past qualifying payments to be deducted as well. It is important to consult with a qualified tax advisor to assess your situation. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.