The 2017 Tax and Employment Reductions Act (TCJA) imposed a limit of $ 10,000 on the federal deduction for state and local taxes for the 2018-2025 tax years. Although companies are not subject to the limit, business owners who pay state and local income tax on pass-through revenue are subject to the limit.
On November 9, 2019, the IRS released 2020-75 Notice indicating that it would issue regulations to clarify that state and local taxes paid by a partnership or corporation would be deductible by the partnership or corporation S when they calculated their pass-through revenue. This guidance paves the way for states to enact legislation that imposes pass-through revenue taxes at the entity level, rather than the level of the individual owner, and thus avoids the $ 10,000 limit on state and local tax deductions (the ” SALT workaround. “)
A bill has already been presented at the South Carolina General Assembly, H 3978, to allow South Carolina taxpayers to take advantage of the SALT workaround. According to the bill, a partnership or S corporation (including limited liability companies taxed as such) can make an annual choice to have the income tax on their active trade or commercial income imposed on the onlending entity itself. If an entity makes the choice, the entity’s owners exclude the commercial or commercial revenue on which the entity has paid tax on its revenue. Since the entity’s owners do not include commercial or commercial revenue in their individual revenue, they do not pay state and local taxes on that revenue and avoid the $ 10,000 limit.
The bill is in the early stages of the legislative process, but it would be a welcome relief for South Carolina taxpayers and will not affect tax revenues raised by South Carolina. If approved, the bill would apply to fiscal years beginning after 2020.
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