Strategies for Minimizing the Impact of the SALT Cap

In response to complaints about the Tax Cuts and Jobs Act of 2017 SALT cap, many states have authorized workarounds that allow a pass-through entity to pay state income taxes at the entity level.

The entity deducts the payments and passes them to the individual owner as deductions or credits, bypassing the SALT cap at the individual level.

CNBC’s wealth editor Robert Frank says, “Companies are not subject to a SALT cap. So, the entity pays the tax and then gets the full deduction from the federal government. Then passes that deduction onto the individual.”

Enacted or Proposed Pass-Through Entity Tax

Thirty states (below) have enacted a version of such a workaround, while five others (Hawaii, Iowa, Kentucky, Vermont, and West Virginia) are considering it.

AlabamaKansasNew York State & New York City
ArizonaLouisianaNorth Carolina
ConnecticutMinnesotaRhode Island
GeorgiaMississippiSouth Carolina
IllinoisNew JerseyVirginia
IndianaNew MexicoWisconsin
** Iowa signed this into law on May 11, 2023. **

Seven states or localities with a personal income tax are not addressing proposals on this issue, including Washington, D.C., Delaware, Maine, Montana, Nebraska, North Dakota, and Pennsylvania.

Finally, nine states with no income tax round out the list, including Alaska, Florida, New Hampshire, Nevada, Tennessee, Texas, Washington, and Wyoming.

What does this mean for me?

If you own a pass-through entity, like an LLC, S Corp, or partnership, you don’t have a SALT cap on your state and local tax deductions. In 2023, New York City was the first municipality to permit this, allowing taxpayers to write off city and state tax.

“It’s estimated that nearly $50 billion in revenue will be lost at the federal level by the time the SALT Cap expires in 2025,” Frank added.

The Plus-Plus

For those that own a pass-through and get their income paid through that entity, you have no cap on your income, plus you get to keep up to $10,000 in other income for property tax.

Be Aware

A workaround can trigger other tax issues for pass-through entities, such as business property valuations. In addition, each state has taken a slightly different approach to SALT workarounds, which creates a complex situation for businesses with a multi-state presence.

Do you have questions?

If you have questions about the SALT Cap Workaround and its impact on your taxes, we can help you navigate the rules and chart the optimal course based on your situation. Give us a call.