These states provide a workaround for the SALT deduction restrict
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As Congress wrestles over changes to the $ 10,000 limit on state and local tax deductions known as SALT, many business owners are already qualifying for a workaround.
The SALT cap was enacted by the Tax Cuts and Jobs Act in 2017 and has been an issue for applicants in high-tax countries such as New York and New Jersey. And some lawmakers have fought to include a change in the Democrats’ spending plan.
While the House package raises the SALT withholding limit to $ 80,000 by 2030, negotiations are ongoing in the Senate with concerns about how to reduce the tax break for the rich.
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Nearly 20 states now have workarounds for the depreciation limit for certain companies and others have pending laws.
Although the IRS and the US Treasury Department have blocked some individual strategies for circumventing the cap, some states have a different method for pass-through deals such as partnerships, suburban corporations, and some LLCs.
The IRS issued state-level guidance on these tactics in November 2020 and given certain companies the green light.
Nearly 20 states have workarounds in place, according to the American Institute of CPAs, some of which will take effect in 2022 or later, and laws are pending in Massachusetts, Michigan, North Carolina, Ohio, and Pennsylvania.
While the maneuver may offer tax savings for some business owners, it may not be the right move in all cases, say financial experts.
“The devil is in the details,” said certified financial planner Sharif Muhammad, founder and CEO of Unlimited Capital Advisors in Somerset, New Jersey.
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Most U.S. corporations are run-through companies, the profits of which go into owners’ individual tax returns.
The new bypass typically includes a state levy on these companies that allows the company to cover some of the owner’s state income taxes.
The transfer company usually pays the fee. But while some states allow corporate-level deductions, others offer credit for taxes paid.
The numbers have to be established and everyone has a different situation.
CEO of Unlimited Financial Services
For example, in California, some companies may pay an additional 9.3% levy on each owner’s share of the company’s net income.
Owners who attend will then be able to claim 9.3% credit on their California tax returns.
“You have effectively prepaid your state taxes on your relayed income,” said Perry Ghilarducci, CPA and partner at Avaunt Ltd. CPAs & Consultants in Sacramento, California.
Not suitable for all businesses
The workarounds may seem like a welcome relief to business owners who spend tens of thousands of dollars in property taxes and state income taxes each year.
However, it is important to get the numbers before taking any steps, Mohammed said.
A business owner needs to review their taxes on a corporate and personal level, he said. For example, if no deductions are listed, the benefits may not be that significant.
In addition, a business owner in a lower tax bracket may overpay his state dues for the year, Ghilarducci said.
“The numbers have to be worked out and everyone has a different situation,” added Mohammed.