Model Act Would Save State Deduction for Partners, S Corporations

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By Che Odom

Business groups are pushing a model state statute designed to preserve for owners of certain limited liability companies the ability to deduct taxes they pay to state and local governments on federal returns.

The organizations, Parity for Main Street Employers and the S Corporation Association, developed a model statute that is similar to legislation awaiting Connecticut Gov. Dannel Malloy’s (D) signature and being considered by lawmakers in New York, the groups told Blomberg Tax.

While the 2017 federal tax act ( Pub. L. No. 115-97) preserved the state and local tax deduction for C corporations, “it denied it to millions of businesses organized as pass-through entities because they pay those taxes at the owner level,” Chris Smith, executive director of Parity for Main Street Employers, told Bloomberg Tax.

Pass-through entities are those in which earnings and income tax liabilities pass through to their owners, whether they are individuals or other businesses.

Under the new federal tax law, only the first $10,000 of taxes paid by individuals to state and local governments are deductible on federal returns. Business entities may deduct the full cost of state and local taxes as business expenses.

The model legislation would shift the tax paid by pass-through businesses from their owners—such as the individual partners in a partnership—to the entity, thereby preserving the deduction.

Connecticut Bill

Like the model act, the Connecticut bill ( S.B.11) would tax the net income of the pass-through business and provide an equal, offsetting individual income tax credit for the entity’s members or owners. Malloy is expected to sign the measure.

Connecticut should be applauded for the legislation, according to Brian Reardon, president of the S Corporation Association, which advocates on behalf of companies with that business organization.

His group is working with companies in New York, California, Michigan, and Wisconsin to push the model act, while still pressing for change at the federal level, he told Bloomberg Tax.

The model act also would recognize the value of similar credits paid by other states to pass-through owners.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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