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November 16, 2020

Treasury Will Allow Some Pass-Through Businesses To Avoid SALT Cap

As The Wall Street Journal reported last week, the U.S. Department of the Treasury has put into place guidance that could allow pass-through businesses in some states to avoid the federal $10,000 cap on state and local tax (SALT) deductions.

As a reminder, the federal tax reform bill signed into law by President Donald Trump in 2017 set a $10,000 limit on the amount of state and local taxes that individuals and small businesses could deduct from their federal tax burden. The cap does not apply to businesses that pay the corporate income tax – those entities can deduct all of their state taxes just as they did before the 2017 law – but it did impact pass-through companies.

Democrats in Congress have opposed the cap and tried to repeal the SALT cap, but Republicans have refused to consider the legislation since it would mainly benefit taxpayers in larger states.

Under the Treasury Department’s new guidance, owners of S corporations and other pass-throughs could avoid the cap by paying those taxes through the business entity – if their state permits that mechanism. New Jersey is one of the states that does, but several others also are considering implementing similar policies. If they do, as University of Chicago law professor Daniel Hemel told The Journal, it “makes it very easy for states to effectively exempt everyone except W-2 wage-earners from the $10,000 SALT cap.”

Click here to read the Treasury Department’s notice.