Tag: SALT

Treasury Department Clarifies that Partnership-level State and Local Income Taxes are Deductible

Posted on by Trey Jackson
IRS building in Washington DC

The Treasury Department and IRS in a recent notice indicated their intent to issue proposed regulations clarifying that state and local income taxes imposed on, and paid by, a partnership or an S corporation are deductible in computing the partnership or S corporation’s taxable income.  (IRS Notice 2020-75) 

  • The announcement has important implications for real estate and other businesses operating in States with high state and local income tax burdens.  The Tax Cuts and Jobs Act of 2017 limits taxpayers’ ability to deduct state and local taxes (SALT) paid at the level of the individual taxpayer to no more than $10,000. 
  • The SALT limitation in TCJA applies to state and local taxes owed on individual wages, as well as state and local taxes paid on business income distributed to partners or S corporation shareholders.  In contrast, state taxes on corporate income remained deductible under the 2017 legislation.  However, prior to Notice 2020-75, it was unclear whether the SALT limitation applied to entity-level income taxes imposed on, and paid directly by, a partnership or S corporation.   
  • The Treasury announcement is an important step towards creating a more level playing field between publicly held C corporations and privately held pass-through businesses.   
  • Over the last three years, several States have modified their tax laws to allow partnerships, S corporations, and LLC’s to pay tax on their business income at the entity level.  States adopting an entity-level tax on pass-throughs include Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin.  In most cases, the regimes are elective.  (CNBC, Nov. 18) 
  • Uncertainty about the federal tax treatment of these regimes has limited their effectiveness.  That could change quickly with the new Treasury guidance.  Similar legislative proposals are pending in Alabama, Arkansas, Michigan, and Minnesota and more may follow in light of Treasury’s clarification.  Entity-level regimes that comply with the Treasury regulations could help restore SALT deductions for a significant share of pass-through business income. 

Other tax and economic policy issues affecting real estate were addressed this week in a CBRE panel discussion that featured Roundtable Senior Vice President and Counsel Ryan McCormick and other industry experts. (video)

#  #  # 

Year-End Tax Package Uncertain; House Ways & Means Votes to Suspend Cap on State and Local Tax Deduction

Posted on by Trey Jackson

WM chairs_x475w

[Above: Members of the House Ways and Means Committee, including Chairman Richie Neal (D-MA), top center, and Ranking Member Kevin Brady (R-TX), top right.]

Prospects for a year-end tax bill are uncertain as congressional leadership and the Trump Administration expect to reveal details of a nearly $1.4 trillion FY2020 spending deal next week.  Meanwhile, the House Ways and Means Committee on Dec. 11 approved a temporary suspension of the $10,000 deduction cap on state and local taxes (SALT) enacted in the 2017 tax reform bill.

  • The Restoring Fairness for States and Localities Act (H.R. 5377) passed Ways and Means on a mostly party line vote of 24-17. The bill would raise the SALT deduction cap from $10,000 to $20,000 for married couples in 2019 and repeal the limit entirely for 2020 and 2021.
  • The measure’s costs would be offset by an increase in the top individual tax rate from 37 percent to its pre-2017 tax law level of 39.6 percent through 2025, when tax provisions in the 2017 tax overhaul are set to expire.  (The Hill, Dec. 11)
  • A description of the proposed changes to the SALT cap and top rate bracket are available from the Joint Committee on Taxation.
  • H.R. 5377 is expected to pass the House if it gets a vote next week on the House floor. The House Rules Committee has announced a hearing on the bill for December 16. However, the GOP-led Senate is unlikely to consider the legislation.  (BGov, Dec. 11)
  • If any tax measures are to be enacted this year, they would likely have to ride on an “omnibus” spending bill, which may be broken into two packages for votes next week before Congress is scheduled to recess on Dec. 20.
  • Disagreements between House Democratic and Senate Republican tax-writers over what measures should have priority, combined with the large number of tax items competing for consideration, are complicating prospects for agreement. 
  • Senate Majority Whip and Finance Committee member John Thune (R-SD) on Dec. 12 said, “At the moment, nothing’s happening.”  (Deloitte Tax News & Views, Dec. 13)
  • Senate Finance Committee member Sherrod Brown, (D-OH) commented to reporters Dec.12 about what tax measures are under negotiation.  “It’s still all over the place,” Brown said.  Committee member Sen. Rob Portman (R-OH) stated, “I’m frustrated because I don’t think we have an agreement yet on anything.”  (Tax Notes, Dec. 13)

A summary of the expired and expiring tax deductions, credits, and incentives that would be renewed through 2020 under the Taxpayer Certainty and Disaster Relief Act (H.R. 3301), which the House Ways and Means Committee approved on June 20, is available from Deloitte Tax LLP.

#  #  #