Treasury blesses workaround to SALT deduction cap for business owners

The Treasury Department and IRS on Monday gave their blessing to a type of state workaround to the $10,000 cap on the state and local tax (SALT) deduction in President Trump’s 2017 tax law.

The guidance could help some business owners get around the cap, which has been among the most controversial provisions in the law.

Several states have enacted legislation under which noncorporate businesses can pay state income taxes at the entity level, rather than at the individual level on their owners’ returns as would be typical. The state actions were intended to help business owners get around the $10,000 limit, because the 2017 legislation only capped the SALT deduction at the individual level.

States that have enacted this type of workaround include high-tax, Democratic-leaning ones such as New Jersey and Connecticut, as well as Republican-leaning states such as Louisiana and Oklahoma.

The Treasury Department and the IRS said that they plan to issue proposed regulations that clarifies that businesses organized as partnerships or S corporations that pay an entity-level state tax can deduct the taxes. Therefore, the taxes would not be subject to the SALT deduction cap on the returns of partners and shareholders in the businesses.

“The Department of the Treasury and IRS are taking the necessary steps to provide fairness for America’s small businesses,” Treasury Secretary Steven Mnuchin said in a news release. “These proposed regulations will offer clarity for individual owners of pass-through entities.”

Treasury and the IRS have previously issued guidance to block a different type of state workaround to the SALT deduction cap that was aimed at converting state and local taxes to charitable contributions.

Republicans enacted the SALT deduction cap in an effort to raise revenue to help pay for tax cuts elsewhere in their 2017 law, and to limit the extent to which the federal tax code subsidizes higher state taxes. Supporters of the cap note that most taxpayers even in high-tax states have gotten a tax cut under the 2017 law.

But politicians in states such as New York, New Jersey and California have argued that the cap hurts their residents and makes it harder for their states to provide robust public services.