Tax Reform Friday: SALT Cap Workaround Battle Continues


Nearly eight months after the passage of the 2017 federal tax act (Pub. L. No. 115-97), states with taxpayers negatively affected by the new $10,000 cap on the deduction for state and local taxes paid continue to work to lessen the damage. As the IRS has released guidance placing roadblocks on certain avenues, including the use of workarounds involving the charitable contributions deduction, states are trying to find new and different ways to circumvent the cap.

Arkansas has produced a new potential solution from its Tax Reform and Relief Legislative Tax force. As reported by Paul Stinson in Daily Tax Report: State (subscription required), the group approved Proposal 30, an idea for a pass-through entity tax. Under the proposal, Arkansas would create an optional tax on pass-through entities with the intent of allowing an owner of one of these businesses to “fully deduct state and local taxes (SALT) from the owner’s federal income tax liability.”

With the creation of this optional system, pass-through entity owners could elect to have the pass-through entity directly pay a tax on income to the state just like a C corporation. As a result, the state would get the same amount in tax, but the entity would pay and be able to take a deduction against the tax, limiting the amount actually passed through to the owners. The practical effect would be that the owners who receive the income would not have it count against the $10,000 SALT deduction cap enacted under Pub. L. No. 115-97.

It remains to be seen whether the IRS will issue guidance against this proposal’s shifting of tax burdens. On May 23, 2018, the service released guidance stating it would not allow the charitable donations structure proposed by several states, including New York and New Jersey.

In New York, the state continues to voice its objections to the cap provision, which Gov. Andrew Cuomo (D) believes unfairly targets residents of the state. On Aug. 7, Cuomo released an open letter asking the state’s federal congressional delegation to fight for the SALT deduction cap’s repeal, as reported by Bloomberg Tax’s Gerald Silverman. The governor pointed to falling home sales as evidence that the provision had harmed New York by causing potential new home buyers to seek more favorable tax jurisdictions.

The state has tried several attempts at working around the cap, including the previously mentioned charitable contributions scheme, an elective payroll tax that would shift the burden of taxation to employers of high earning residents, and a lawsuit arguing that the cap is unconstitutional for its interference with state rights. With all of those workarounds in play, New York has added this urging to direct action by its congressional delegation. Whether they will be able to make any headway in repealing the provision remains to be seen.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should states implement workarounds for the cap on the SALT deduction?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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