How To Deduct State And Local Taxes Above SALT Cap

Are you disenfranchised from state and native tax deductions since you exceed the SALT cap of $10,000 per 12 months? 

Organizing an LLC for your corporation can convert non-deductible SALT right into a enterprise expense. Seventeen states have enacted SALT cap workaround legal guidelines, and a number of other others are working in direction of enactment. IRS Notice 2020-75, issued on Nov. 9, 2020, gave the inexperienced mild to those state legal guidelines. Most states drafted their guidelines to adjust to this discover. 

These state legal guidelines appear to incorporate a buying and selling enterprise eligible for trader tax status (TTS) however not funding corporations. (The explanation: TTS entities have enterprise expense therapy, whereas funding corporations have suspended funding bills.)

The states which have enacted SALT cap workaround legal guidelines with the efficient date:

There’s pending laws in Illinois, Massachusetts, Michigan, North Carolina, Oregon, and Pennsylvania.

These SALT cap workaround legal guidelines don’t considerably impression state revenues and incentivize entrepreneurs to stay of their state. Even when Congress repeals or revises the SALT limitation, the SALT cap workaround is the higher possibility since you’ll be able to deduct enterprise bills from gross revenue versus itemized deductions topic to an AMT limitation.

California’s new legislation robotically repeals its SALT cap workaround if Congress repeals the SALT cap limitation. For particulars on California and a number of other different state legal guidelines, see ongoing updates to my June 22, 2021 weblog publish, Unlock State & Local Tax Deductions With A SALT Cap Workaround. Additionally, the podcast SALT workaround elective pass-through entity tax (Spidell’s California Minute, July 18, 2021) is a superb pay attention for California residents.

TTS merchants produce other compelling causes to contemplate an LLC partnership or S-Corp. 

• A brand new LLC taxed as a partnership or S-Corp (pass-through entity PTE) can elect Part 475 MTM inside 75 days of inception. That is useful for the reason that particular person sole proprietor deadline for a 475 election has handed. Part 475 gives tax-loss insurance coverage by its exemption from wash gross sales and the capital loss limitation. Additionally, it provides an opportunity to get a 20% certified enterprise revenue (QBI) deduction on TTS/475 internet revenue. 
• An LLC taxed as an S-Corp unlocks medical insurance and retirement plan deductions for TTS merchants.

Now greater than ever earlier than could be the time to type your TTS entity, however it’s good to act rapidly. Buying and selling in an entity brokerage account for at the very least all This fall 2021 will enable you qualify for TTS. The entity can solely pay SALT enterprise bills on the entity revenue.

Many states require an election, some by companion, and SALT PTE tax funds have due dates. Dig into the main points of your state. Don’t miss the boat!

Darren Neuschwander CPA contributed to this weblog publish.