December 16, 2019

House To Consider Tax Bill That Could Impact Pass Through, S Corporations

Last week, the Main Street Employers coalition sent a letter to the U.S. House Ways and Means Committee raising concerns with a bill, H.R. 5377, that would provide temporary relief from the State and Local Tax (SALT) tax deduction cap established by the 2017 tax reform bill by raising the top tax rate applied to pass-through business income.

The letter explained, “Individually and family owned businesses organized as S corporations, partnerships and sole proprietorships are the heart of the American economy. They employ the majority of workers, and they contribute the most to our national income. They also pay the majority of business taxes. … The legislation introduced today would raise these taxes by 1) increasing the top rate pass-through businesses pay from the current 37 percent to 39.6 percent and 2) lowering the income threshold of the top rate from $622,050 to $496,600 (Joint) for the years 2020 through 2025, after which the 37 percent rate is scheduled to expire under current law.”

Specifically, the legislation:

  • Increases the dollar limitation on the deduction of certain state and local property, income, and sales taxes to $20,000 for married individuals filing a joint return and $10,000 for a married individual filing a separate return for taxable years beginning after December 31, 2018, and before January 1, 2020.
  • Removes the limitation on the deduction for certain state and local property, income, and sales taxes for taxable years beginning after December 31, 2019, and before January 1, 2022.
  • Repeals the new 37 percent tax bracket and return the restored 39.6 percent rate to its pre-tax reform income thresholds (from $622,050 to $496,600).

According to the S Corporation Association, the relationship between the new SALT deduction cap and pass-through business is complicated, and C corporations do not face the same complexity. (C corporations can fully deduct their SALT while S corporations cannot.)

The SALT cap only applies in states with income taxes, and then only if the businesses taxes are paid at the shareholder level. So for S corporations residing in Texas (where there is no income tax) or Wisconsin where there is parity in law between S and C Corporations, SALT isn’t an issue. As such, the Main Street Partnership letter reminded lawmakers that, “while this SALT relief will benefit some pass-through businesses, those savings will be reserved only for businesses residing in certain states, while the tax hike will apply to businesses in all fifty states.”

The full U.S. House of Representatives is expected to vote on H.R. 5377 this week. According to Newsday, it faces an “uphill battle” in the U.S. Senate. Stay tuned to Connecting the Dots for updates as this legislation moves through the U.S. Congress.