These states provide an alternative to the SALT deduction cap.

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SALT Deduction Cap

Many business owners already qualify for a workaround while Congress debates revisions to the $10,000 cap on the federal deduction for state and local taxes, known as SALT.

 

The SALT cap, which was enacted by the Tax Cuts and Jobs Act in 2017, has been a source of frustration for taxpayers in high-tax states like New York and New Jersey. Moreover, some senators have fought to get a modification included in the Democrats' spending plan.

 

While the House bill increases the SALT deduction maximum to $80,000 until 2030, the Senate is still working out how to minimize the tax incentive for the wealthy.

 

Meanwhile, nearly 20 states are providing solutions for the write-off restriction for specific enterprises, while others have legislation in the works.

 

Although the IRS and the US Treasury Department have barred some individual tactics to get around the cap, some states offer a different mechanism for pass-through entities including partnerships, S-corporations, and some LLCs.

 

In November 2020, the IRS provided advice on these state-level strategies, approving them for some corporations.

 

While the approach may save some business owners money on taxes, financial experts say it isn't always the best option.

 

"The devil is in the details," said Sharif Muhammad, the founder and CEO of Somerset, New Jersey-based Unlimited Capital Advisors.

 

What is the structure of the pass-through tax?

The majority of firms in the United States are pass-through entities, meaning that profits are distributed to the owners' personal tax returns.

 

The new bypass usually entails a state charge on these enterprises, which allows the business to offset a portion of the owner's state income taxes.

 

The fee is usually paid by the pass-through firm. However, while some states allow a deduction at the entity level, others grant a tax credit.

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