California, New York Governors Support Tax Parity For S-Corporations

As MSCI’s allies at the S-Corp Association reported last week, California Gov. Gavin Newsom (D) and New York Gov. Andrew Cuomo (D) have included the association’s SALT Parity proposal in their respective budget proposals for 2021. Seven states (Connecticut, Wisconsin, Oklahoma, Louisiana, Rhode Island, New Jersey, and Maryland) already have adopted this reform and the association expects another dozen or so to take up SALT Parity legislation this year.

These efforts would help small businesses struggling to survive during COVID-19 by allowing pass-through businesses to continue to fully deduct their state and local income taxes on their federal returns. (As a reminder, the federal tax reform legislation signed into law in 2017 by President Donald Trump capped deductions for state and local income taxes at $10,000 per year for individuals and pass-through businesses, but not C corporations.)

The California and New York proposals, like proposals in other states, would permit pass-throughs to restore the value of their lost federal SALT deductions by electing to pay those taxes at the entity level, rather than at the shareholder or partnership level. This change would result in a full deduction for the business and it would protect shareholders and partners from a double tax through an income exclusion or tax credit.

The SALT parity efforts are necessary in states where taxes on pass-through business income are paid by the owners, not the business. In other states, like Tennessee for example, SALT is already fully deductible because small businesses already tax pass-through business income at the entity level. States with no individual income tax, like Texas and Florida, also are unaffected by the new SALT cap.

The S-Corp Association estimates there are 41 states that would benefit from its SALT parity efforts and, as noted above, seven have already adopted SALT Parity legislation.