Some states provide workarounds for state and native tax withholding limits

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A growing number of states are offering pass-through business owners a workaround for the US $ 10,000 state and local tax deduction limit known as SALT.

As a controversial part of Republican tax reform in 2017, the SALT depreciation cap is costly for applicants who can break down deductions and claim no more than $ 10,000 in property and state income taxes.

The limit has been a strain on those in high-tax countries like California, New Jersey, and New York. Despite pushing for the law to be repealed, President Joe Biden did not include the measure in his proposals.

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Although the IRS and Treasury have blocked some individual strategies for bypassing the cap, some states have put in place a workaround for pass-through businesses like partnerships, suburban companies, and some LLCs.

The IRS issued state-level guidance on these tactics in November 2020 and given certain companies the green light.

More than a dozen states have passed laws to approve the workaround, including Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin, according to the American Institute of CPAs.

Laws are pending in Illinois, Massachusetts, Michigan, North Carolina, Oregon, and Pennsylvania, the AICPA said.

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

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

This is how the tax on transit companies works

Most U.S. corporations are run-through companies, the profits of which go into owners’ individual tax returns.

The new bypass typically includes a state levy on these companies that allows the company to cover some of the owner’s state income taxes.

The transit company usually pays the fee. But while some states allow corporate-level deduction, others offer credit for taxes paid.

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

Sharif Muhammad

CEO of Unlimited Financial Services

For example, California Governor Gavin Newsom signed law last week that allows some companies to pay an additional 9.3% royalty on each owner’s share of the company’s net income.

Owners who attend will then be able to claim 9.3% credit on their California tax returns.

“You have effectively prepaid your state taxes on your relayed 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 spend tens of thousands of dollars in property taxes and state income taxes each year.

However, it is important to crack the numbers before taking any steps, said Muhammad.

A business owner needs to review their taxes on a corporate and personal level, he said. For example, if no deductions are listed, the benefits may not be that significant.

In addition, a business owner in a lower tax bracket may overpay his state dues for the year, Ghilarducci said.

“The numbers have to be drawn up and everyone has a different situation,” added Mohammed.