Rhode Island Passes SALT Deduction Work Around For Small Businesses

On July 5, Rhode Island Gov. Gina Raimondo (D) signed the state’s fiscal year 2020 state budget bill, which, as Bloomberg Tax explains, includes a provision that will help businesses circumvent the $10,000 cap state and local tax deductions that was included in the federal tax reform bill signed into law in late 2017.

Specifically, as this article notes, the budget sets a 5.99 percent levy on pass-through entities and allows pass-through owners to access a state credit equal to 100 percent of the owner’s share of tax paid by the business. According to Bloomberg, “The strategy effectively lets pass-through owners take bigger federal write-offs to help offset their previously unlimited SALT deductions.” The provision will be in effect for 2019 tax year.

As Connecting the Dots has reported previously, Rhode Island is part of a growing movement of states trying to mitigate the loss of the SALT deduction for pass-through businesses.

The S-Corp Association has argued states must alter their laws to allow S corporations and other pass-through businesses the option of paying their taxes at the entity level. Specifically, the S-Corp Association recommends that this legislation:

• Switch the incidence of tax on pass-through business income from the owner to the entity, making those taxes deductible at the Federal level; and
• Giving those owners a credit for the taxes paid at the entity level;
• Recognize the value of similar credits paid by other states to pass-through owners.

This past May, the Parity for Main Street Employers coalition, which the Metals Service Center Institute is a member of, released model legislation that would achieve these goals.

Connecting the Dots will continue to report as states consider this legislation, or other bills, like Rhode Island’s, that would preserve the SALT deduction for small businesses.