Pass the Salt…Deductions

spoiler alert: this might be a bit accountant-y sounding. don’t worry, it’s good for you.

When the Tax Cuts and Jobs Act was enacted in 2017, the $10,000 cap on state and local taxes deductions left residents in high tax states out in the cold. For example, many New Yorkers and Californians know it is not unusual for state income tax amounts to approach the cap from payroll deductions alone. Add in property taxes and many are no longer able to offset the high cost of living at tax time.

Since the enactment, various states have been looking to provide workaround to residents without much success – until now. 

On November 9th, 2020, the IRS released Notice 2020 – 75. This Notice announced that business owners can now benefit from state and local taxes imposed, paid, and deducted at the S corporation or partnership – including LLCs – level without having to worry about the SALT deduction cap. 

To illustrate, let’s say you and a buddy own real estate through an LLC in Connecticut. Your business files their taxes in Connecticut and gives you a CT K-1. If the business owed taxes, you should expect to see your portion of the tax reported on your K-1. Under the new rules, you would benefit on your personal return from the taxes paid at the entity level without having to limit the amount of property tax you can deduct for your Stamford, CT home. The same would be true if you lived in Brooklyn (in other words, you’re a non-resident of Connecticut). 

Connecticut is not the only state that has entity level taxes for passthrough entities. Louisiana, New Jersey, Oklahoma, Rhode Island and Wisconsin also have an entity level tax on passthrough entities. 

As always, I’ll be keeping an eye out to see what the IRS and the various states are up to. If you’re feeling super nerdy, you can find the Notice here: https://www.irs.gov/pub/irs-drop/n-20-75.pdf.

So are you confused or very confused? I hope this was clear, but if I completely confused you, drop them questions in the comments below.