Home Muhammad These states provide a workaround for the SALT deduction limit

These states provide a workaround for the SALT deduction limit

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José Luis Pelaez | Iconic | Getty Images

As Congress grapples with changes to the $ 10,000 cap on the federal deduction for local and state taxes, known as SALT, many business owners are already eligible for a workaround.

Passed by the Tax Cuts and Jobs Act in 2017, the SALT cap has been a pain point for filers in high tax states, such as New York and New Jersey. And some lawmakers have fought to include a change in the Democrats’ spending plan.

As the House package increases the SALT deduction limit to $ 80,000 through 2030, negotiations are underway in the Senate, with concerns over how to reduce tax relief for the wealthy.

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In the meantime, nearly 20 states are offering workarounds for the write-off limit for some businesses, and others have pending legislation.

Although the IRS and the US Department of the Treasury have blocked some individual strategies to get around the cap, some states have an alternate method for intermediary businesses such as partnerships, S corporations, and some limited liability companies.

Theirs directives issued on these state tactics in November 2020, giving the green light to some companies.

Nearly 20 states have adopted workarounds, some of which are effective in 2022 or later, according to the American Institute of CPA, and there are pending laws in Massachusetts, Michigan, North Carolina, United States of America. Ohio and Pennsylvania.

While the maneuver may offer tax savings for some business owners, it may not be the right decision in all cases, according to financial experts.

“The devil is in the details,” said Sharif Muhammad, certified financial planner, founder and CEO of Unlimited Capital Advisors in Somerset, New Jersey.

How the business pass-through tax works

Most US businesses are intermediary businesses, with profits going to the owners’ individual tax returns.

The new bypass typically involves a state tax on these businesses, allowing the business to cover a portion of the owner’s state income taxes.

The transfer company usually pays the tax. But while some states allow an entity-level deduction, others offer a credit for taxes paid.

The numbers have to be presented, and everyone has a different situation.

Sherif Mohammed

CEO of Unlimited Financial Services

For example, in California, some businesses may pay an additional 9.3% levy on each owner’s share of the company’s net income.

Homeowners who participate can then claim a credit on their California tax return equal to the 9.3% tax.

“You have effectively prepaid your state taxes on your transferred income,” said Perry Ghilarducci, CPA and partner at Avaunt Ltd. CPAs & Consultants in Sacramento, California.

Not suitable for all businesses

The workarounds may seem like a welcome relief for business owners who shell out tens of thousands of dollars in property and income taxes every year.

However, it is essential to calculate the numbers before doing anything, Muhammad said.

A business owner needs to review his taxes at the entity level and at the personal level, he said. For example, if they do not itemize the deductions, the benefits may not be as great.

Plus, a business owner in a lower tax bracket may overpay their public deductions for the year, Ghilarducci said.

“The numbers have to be presented, and everyone has a different situation,” Muhammad added.