How Has Elimination Of The State And Local Tax Deduction Impacted Small Businesses?

As the S-Corp Association noted last week, the U.S. House Select Revenue Subcommittee recently held a hearing on how limiting the state and local tax deduction (SALT) to $10,000 has harmed communities, schools and housing values. While the hearing did not discuss small businesses, the limitation, implemented with the 2017 federal tax reform bill, has raised the tax burden on these companies. As a result, the S-Corp Association argues, “[T]hese businesses at a disadvantage compared to those operating in states that have no income tax, like Texas and Florida.”

The Association estimates 3.6 million of the 4.8 million S corporations nationally will lose their SALT deduction in 2019. As a result, they will pay an extra two percentage points of tax on average. Millions more partnerships will suffer the same tax increase.

In response to the limitation, the Parity for Main Street Employers Coalition, which MSCI is a member of, have been working with lawmakers in various states to restore the SALT deduction at the state level by allowing pass-through businesses the option of paying their SALT at the entity level. To date, four state legislatures have adopted this reform: Connecticut, Wisconsin, Oklahoma, and Louisiana.

As the S-Corp Association explains, one outstanding concern for businesses, however, is how the Internal Revenue Service will respond to state action. So far the IRS has been silent on the matter, but that silence is not expected to last. Stay tuned to Connecting the Dots for information about the IRS’ handling of this issue.