As Dems push SALT cap repeal, many states have OK’d workaround
The IRS says it is okay for small business to pay income taxes at the entity level
Some Democrats in Congress are pressing President Biden to repeal a $10,000 cap on state and local tax deductions as he considers tax increases, but a number of states have already approved a method that allows some residents to circumvent the cap.
The push to repeal the cap has garnered the support of Sen. Majority Leader Chuck Schumer, D-N.Y., and House Speaker Nancy Pelosi, D-Calif., who live in high-tax states where residents would benefit from terminating the cap.
A number of states have implemented a variation of a workaround that the IRS already allows.
The IRS issued guidance allowing small businesses – classified as pass-through entities, proprietorships and partnerships – to circumvent the cap by allowing them to pay their income taxes at the entity level.
The Tax Cuts and Jobs Act cap applies to income taxes paid by individuals, which is normally how pass-through entities have paid since the early 1990s.
SALT CAP WORKAROUND GETS GREEN LIGHT FROM IRS
New Jersey and Connecticut have permitted strategies to allow business owners to take advantage of the guidance, as have Alabama, Rhode Island, Wisconsin, Louisiana, Oklahoma and Maryland.
Arizona recently passed an allowance, as did lawmakers in California, Massachusetts and Oregon.
In June 2019, the IRS blocked a strategy whereby states attempted to allow taxpayers to make charitable contributions to an established state fund in order to earn a credit. The goal was to allow the residents to take the full amount given as a deduction by transforming a non-deductible payment into a charitable contribution.
The $10,000 cap is scheduled to expire after 2025.
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Democrats want it repealed alongside the president’s broader proposals to raise revenue with tax increases, although the federal government would lose revenue if it removed the SALT cap.
The White House has yet to come out in support of the proposal, though it has indicated on several occasions that it has been part of negotiations.
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It is not clear whether Democrats will ultimately push for a full repeal or settle for relaxing the cap slightly.
Republicans have characterized the effort to repeal the cap as a tax cut for the wealthy. An analysis conducted by the Tax Foundation estimates its repeal would cost $600 billion in revenue over the course of a decade, with the largest relief aimed at the top 1% of earners.