Four years after passage of the Tax Cuts and Jobs Act, the bill’s $10,000 cap on state and local tax (SALT) individuals can deduct from their federal tax liability still frustrates taxpayers — especially those in high-tax states.

Depending on which state you live in, however, you might be able to take advantage of a workaround that essentially circumvents the SALT cap. Because the SALT cap does not apply to business entities, owners of pass-through entities like S corps and LLCs can report business income on their personal tax returns, shifting state income taxes back to the pass-through entity.

Twenty-three states have passed legislation that imposes an entity-level income tax on pass-through entities: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oklahoma, Oregon, Rhode Island, South Carolina, and Wisconsin. Additionally, Michigan, North Carolina, and Pennsylvania have introduced such legislation.

Each state varies, but they all follow one of two methodologies:

• Excluding income taxed at the entity level from the owner’s taxable state income
• Passing through the owner’s share of distributed income as usual but allowing a credit for the tax that the entity pays.

The $10,000 SALT cap remains in place until at least 2025. While there’s no way to tell if it will continue in its current form, the tax savings steps outlined above could help owners of profitable pass-through entities in 23 states reduce their tax liability substantially.

Every transaction or investment decision has a tax consequence. Dembo Jones’ experts can guide you through these complexities and constant changes in the tax code to help you comply with requirements while minimizing your tax liability. Contact us today.