The IRS has thrown in the towel.

But, I’m guessing that’s only because the 2020 elections have removed the hand on the scales of justice.  After all, the TCJA (Tax Cut and Jobs Act [sic]) of 2017 was clearly formulated to poison the atmosphere in the Blue States.  Because they provided services and better educational opportunities than do the Red States, which is why their state tax bills are higher.  So, limiting state/local/property tax deductions to $ 10,000 was the GOP way of sticking it to the states where Democrats are in the majority.  (Note further that these states are generally the more populous ones.)

And, many of those Blue States developed concepts to circumnavigate these limitations.  The first forays were rejected by the IRS.  The initial concept was to let folks ‘donate’ money to the state, in amounts equal to their state obligations.  But, the IRS issued regulations in 2019, rendering the concept unusable.  (Only if 15% or less of the charitable contribution covered the state tax obligation would it be permissible.) The IRS made these rules even though some of these work-arounds were being used for years by Red States.  So, the IRS rejection also hurt their provisions.

But, the new programs were much smarter.  OK- much smarter if you owned a pass-through company!  As I reported,  places like Connecticut and New Jersey lets pass-through businesses cover the state income taxes on behalf of their members/stockholders.

And, as of 9 November 2020, the IRS has approved these shenanigans.  (IRS Notice 2020-75.)  And, as noted, this work-around only applies to the owners of businesses, not to their employees.  Partnerships and S corporations can pay their owners’ state taxes- and since state taxes have no limitation for business returns, this would be fully deductible to the owners of the pass-through entities.  (Rules such as these obtain in Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin.)

The IRS regulations stipulate that the State Income Tax Payment (SITP) must be reflected in the K-1’s issued to the owners of the business.  It will reflect the pro-rata share of those payments.

Given these regulations, you can bet other states will enact laws that let their business owners garner such benefits, too!

But, the real guarantee?   Once there is a new administration, there will be a strong push to repeal the SALT (state and local tax) limits.   Because now it’s clear that the SALT limitation only penalizes employees- and not business owners.  Which makes the provision wholly unfair.

Share this: