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May 29, 2018

MSCI Coalition Fights For Small Business Parity On SALT Deduction

Last week, the Parity for Main Street Employers coalition, which the Metals Service Center Institute is a member of, released model legislation to preserve the federal State and Local Tax Deduction (SALT) for small businesses organized as pass-through entities.

The release follows recent action by Connecticut lawmakers to enact similar legislation. As Connecting the Dots readers are aware, the federal tax reform law preserved the SALT deduction for C corporations, but denied it to millions of businesses organized as pass-throughs if they pay those taxes at the owner level. (Businesses remain able to deduct taxes that are paid at the entity level.) The model legislation, like the Connecticut bill, would shift the tax paid by pass-through businesses from the owner to the entity, thereby preserving the SALT deduction.

According to the Joint Committee on Taxation, the tax hike from the loss of the SALT deduction is significantly bigger than the benefit of the 20 percent pass-through deduction.

The model legislation would:

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

These changes would restore the deductibility of these taxes, all at no cost to the state.

In related news: the Internal Revenue Service issued a notice announcing that it will soon issue regulations and guidance clarifying the treatment of income recharacterized for purposes of working around the new $10,000 cap on the state and local tax (SALT) deduction. As the Tax Foundation explains, in the notice, the IRS emphasized the “substance over form” doctrine, meaning that the IRS cares about the actual substance of a payment, and not the name or form it may be given. Stay tuned to Connecting the Dots for more information about this issue after the IRS releases its regulations.