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SALT Workaround Removed From Tax Bill

According to Bloomberg, the House Republicans’ bill to expand President Donald Trump’s 2017 tax law would generate revenue by eliminating the workarounds that various professional service providers utilize to avoid the cap on state and local tax (SALT) deductions.

Professional groups, such as the AICPA, are already requesting amendments that would bring back the value of passthrough entity tax (PTET) regimes that are now popular in 37 states, including New York City. PTET became popular after the 2017 law placed a $10,000 cap on SALT payments that can be deducted from individuals’ federal returns.

These tax strategies give partnerships and S corporations the chance to pay state and local taxes at the entity level, and not have individual members pay as they usually would. As a result, this will help the individuals avoid the SALT limit, Bloomberg explained.

Melanie Lauridsen, vice president for tax policy at AICPA, stated that the House proposal, which was approved during a Ways and Means Committee vote May 14, was drafted to exclude businesses described as a “specified service trade or business” from utilizing PTET workarounds to limit their members’ federal tax obligations. This policy shift, if implemented, would boost taxes for millions of companies offering accounting, legal, consulting, medical and financial services, she stated.

“It’s very targeted and puts passthroughs in a service industry at a worse position,” Lauridsen warned. “This isn’t just an accounting issue. It’s all service businesses—doctors, dentists, lawyers—industries where knowledge is the service being offered.”

Aside from this, the proposal makes disparities worse in the manner C corporations and passthrough entities are treated under the federal tax code, stated Mark Koziel, AICPA’s president and chief executive officer.

“We remain deeply troubled by the proposed changes to the PTET deduction,” Koziel noted in a statement. “The changes to this vital deduction are unfair to businesses that are the backbone of the American economy, which include accounting firms, medical offices and Main Street businesses, of which the majority are structured as passthroughs.”

By reducing eligibility for state passthroughs, House tax writers would generate revenue by taking out between 35 and 40 percent of the tax benefits out of the state programs, stated Kyle Pomerleau, a federal tax policy senior fellow at the American Enterprise Institute, Bloomberg said

According to Bloomberg, the PTET proposal has not been scored by the nonpartisan Joint Committee on Taxation, but Pomerleau projected that the federal government could have $7 billion a year coming from removing those eligibility requirements. In 2024, he estimated that the full elimination of PTETs would garner $20 billion next year, and approximately $200 billion in 10 years.

Additionally, Pomerleau noted that tax writers are offering service providers affected by the change a benefit in a higher SALT cap for individuals, set at $30,000. However, that number could change given the House Republicans due to objections from high-tax states. Additionally, the qualified business income deduction for passthroughs, under Section 199A, would become permanent and increased to 23 percent from 20 percent.

However, many passthrough businesses would still be in a worse tax position, he said.

The number of states that might respond if the federal ground rules change starting next year is not clear. At a minimum, 10 states would have to extend their PTET programs given that the proposed law would not fully take out workarounds. California, Colorado, Iowa, Illinois, Massachusetts, Michigan, Minnesota, Oregon, Utah and Virginia have all set their programs to end if the SALT deduction cap is discontinued or expires.

California Department of Finance Director Joe Stephenshaw noted that his state is going to proceed with an extension while examining how the amended SALT cap would affect state taxpayers. He made his remarks on May 13 during a news conference to present an updated budget plan for the next fiscal year.