Overview: Mitigating the Federal SALT Limitation
As you probably know, part of the “Tax Cuts and Jobs Act of 2017” (“TCJA”) was a severe limitation on the deductibility of state and local taxes for federal income tax purposes (the SALT limitation). To mitigate the impact of this on many small business owners, New York State passed a law allowing pass-through entities to pay tax at the entity, rather than individual, level.
- The election applies to pass-through entities only (partnerships and S corporations)
- The tax rate is 6.85% on profits up to $2 million with marginal increases thereafter
- Because TCJA did not impose SALT limits on entity taxes, any amount paid to New York State is deductible on federal corporate and personal returns
- Additionally, tax paid at the entity level can be treated as a refundable credit on New York State personal returns
- This is an annual election as long as the law remains in effect:
- Deadline for Tax Year 2021: October 15, 2021
- Deadline for subsequent tax years: March 15 of the applicable tax year
- Once the election has been made for a particular tax year, it cannot be changed
Strategy: Deciding Whether to Make the Election
Most owners of pass-through entities that anticipate a profit can reduce their overall tax bills – sometimes significantly – by making this election. Again, this does not apply to sole proprietors, but only to S corps and partnership structures.
Partners who are not New York residents may not be able to take full advantage of the tax credits, and thus may receive little or no benefit.
Execution: Making the Election
Complete a relatively straightforward online form before October 15 in order to make this election. The law does not permit CPAs or other agents to act on behalf of clients.
Exploration: Understanding What Other States are Doing
Other states with comparatively high state and local tax rates have also taken some steps to help business owners who may suffer because of the SALT limitations. Here is a summary of three such states where our clients most frequently have business interests:
- New Jersey: Statutory minimum tax still applies, although excess credit may carry forward for up to 20 years.
- Connecticut: Any excess credit is refundable against individual income tax, once other tax liabilities are satisfied. Corporate/business excess carries forward.
- California: Excess credit is nonrefundable but can be carried forward for up to five years.
Questions or Concerns
If you held a mid-year tax strategy session with your AKM CPA, we have likely already reviewed and evaluated your options with you.
Keep in mind that you cannot change the election for a given tax year once you have made it, so carefully consider whether you will benefit from it. Your AKM CPA can help you evaluate the likely impact on your overall tax bill.
As always, if you have any questions or concerns, we are here to help.
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Author Of this post: AKMCPA Team