Posted on 10/12/2021 7:21:12 AM PDT by Kaslin
Before Congress completes consideration regarding either or both mega-infrastructure bills, it needs to determine how it will offset the reduction in federal tax revenues that will occur resulting from the many states’ legislation passed in 2021 to “work around” the state and local tax (SALT) deduction cap of $10,000.
It matters not whether each or any member of Congress believes the $10,000 SALT cap is justified and/or unjustified or whether the members of Congress believe the “workarounds” are appropriate. The loss to Treasury could be in the hundreds of billions of dollars. The loss of revenues either needs an offsetting tax increase or clarity that it has been considered in the calculation of expected future deficits. Either decision should impact the ultimate size of the mega-infrastructure bills.
The Tax Cuts and Jobs Act of 2017 placed a cap on state and local tax deductions (SALT) of $10,000. Simultaneously, the Act increased the standard deduction from $6,500 to $12,000 for single individuals and $13,000 to $24,000 for married couples. The increase in the standard deduction was in great part made to offset the loss of the SALT deduction. Congress also decreased the top federal tax rate from 39.6% to 37% and enacted a qualified business income deduction.
High tax states believed that the $10,000 cap on SALT deductions was unfair as there was no previous cap on SALT deductions (save for the possibility of alternative minimum tax issues). Immediately after the passage of The Tax Cuts and Jobs Act of 2017, these states immediately began considering various legislative alternatives to allow their residents to avoid the $10,000 cap.
In November 2020, the Internal Revenue Service released Revenue Notice 2020-75 announcing that partnerships and Subchapter S Corporations could deduct SALT directly against the income produced by these entities thus avoiding the SALT cap limitation for income earned by these entities. (It is assumed that LLCs are considered partnerships under Revenue Notice 2020-75.)
Following the release of Revenue Notice 2020-75, most of the high tax states began to consider and have now passed “workaround” legislation. More than a dozen states including New York and California have passed such legislation effective for 2021. Each state has its own specific legislative spin on their “work around.”
The state “workarounds” are a tax shelter salesperson’s dream. There is no risk to the taxpayer and no cost to the state passing the legislation. State tax revenues will remain the same; federal tax revenues paid by the state residents will decline dramatically. The only step necessary for the taxpayer to be able to deduct SALT which are the result of a partnership, LLC or Subchapter S corporation’s activities is to have the entity pay the tax directly to the state rather than have the individual pay the tax with their individual tax return. Perhaps it also requires the payment to be made to a different address.
It does not appear that anyone has modeled the impact to Treasury of the result of Revenue Notice 2020-75 and these state legislative activities.
The only discussion that has emerged has been with respect to the cost to the Treasury if the entire SALT cap is removed. CBO projected in 2019 that the elimination of the SALT cap for the calendar year 2021 would be $88.7 billion. This commonly referred to estimate was made before “workaround” legislation was passed by various state legislatures.
The Tax Policy Center made its projection in 2016 predicting a cost of $738.2 billion in lost revenues to Treasury if Salt was eliminated for the five years beginning in 2021. This projection was made before both the the Tax Cuts and Jobs Act of 2017 and the state “workaround” legislation.
The “workaround” legislation, the federal law changes in The Tax Cuts and Jobs Act of 2017, and the combination of these has made previous studies nothing more than historical footnotes. This cat is long since out of the bag. A large percentage of the revenue losses to Treasury are already lost due to state legislation.
The reduction in federal revenues from the “workarounds” will result from a plethora of existing activities and planning: (a) taxpayers owning the described entities will now pay their taxes to the state using entity checking accounts, (b) taxpayers will convert single member LLCs and sole proprietorships into the described entities, and (c) taxpayers will find ways to convert all kinds of income into income which their state will consider business income. Revenue Notice 2020-75 will further result in the lowering of adjusted gross income and remove business related SALT from the AMT.
Many small business owners who are currently taking the new higher standard deduction will continue to take the new higher standard deduction along with paying their business-related SALT through their described entity tax returns providing a windfall for many small businesses. Every taxpayer making their state tax payments through their qualifying entities will see their adjusted gross income decline and therefore will see other available deductions and credits be more available to them. Employees will not receive a penny of benefit from the state "workarounds."
Over the next five years, the impact of the state "workarounds" to Treasury revenues could easily be in the hundreds of billions of dollars. CBO needs to estimate this amount. (While all the current Congressional discussion has turned to trillions because of the infrastructure bills, note that the total federal cost of Hurricane Katrina was $120 billion.)
“According to reports, Republicans are still furiously debating changes to their bill. And one knows when they will put the bill on the floor. A bill like this deserves weeks of debate on the floor," said Charles Schumer on November 29, 2017. This should be what is happening in 2021.
Ways & Means along with CBO should be studying the impact to Treasury revenues from the SALT "workarounds." All we know at this point is that already passed state legislation while costless to the states is going to cost the Treasury billions and billions. No one seems to have noticed.
yep, NY sent out a notice that businesses can make an election for 2021 for this workaround
It adds like 10 dollars per 1,000 dollars. These poor rich people have it so rough.
Finding loopholes in tax legislation is a major industry at this point.
“Tax the rich” really means “Make tax attorneys rich”.
Tax deductible taxes , only a Democrat could come up with that ,LOL
But how does a high tax state now get around the federal deduction cap? That part I did not get from the article.
A Dumb question:
To receive this deduction, must the real estate be corporate property?
I once worked for a company where the owner’s brother-in-law was #2 in the corporation and he took it to the cleaners.
The B-I-L owned a related company and somehow his bills became mixed with the other company?
The guy I worked for lost EVERYTHING, HOUSE, BOAT AIRPLANE... Because everything was owned by the corporation for the tax advantage.
What's the problem...SALT wasn't intended to hurt small business, and the legislative work around leaves SALT in place for millions of property owners in high tax states.
Quick, everyone incorporate as an LLC and rent your house to yourself.
In November 2020, the Internal Revenue Service released Revenue Notice 2020-75 announcing that partnerships and Subchapter S Corporations could deduct SALT directly against the income produced by these entities thus avoiding the SALT cap limitation for income earned by these entities.
Perhaps an example would have been a good idea here. State and local taxes were always fully deductible for businesses, regardless of any $10,000 SALT cap imposed by Congress on individual income.
In fact, when the 2017 tax bill was passed I said at the time that a simple workaround would be for two neighbors to buy each other's homes through LLC-type ownership arrangements and rent them to the other person. That way they'd still get to live in the house they currently occupy, but they get to keep all the tax deductions that otherwise would have been limited by the $10,000 SALT cap on personal income taxes.
1. There is no $12,000 or $24,000 standard deduction on business income.
2. You lose the capital gains tax exemption on a primary residence if you own it through a corporate structure like that.
Lol...gonna catch an audit doing crazy stuff like that.
No workaround for Individual Filers though.
And soak the middle class who can’t afford those tax lawyers
The rats know who butters their bread
Let's say the person owns an LLC and makes a million dollars pass through income which is then taxed at the individual level. If the LLC picks up a $50k state income tax bill for the owner and then passes on the remaining $950,000 for the owner, how is the $50k not added as a taxable benefit?
Most years my company gives out a jacket or something similar as a Christmas gift along with a coupon for a ham or turkey. They can do that because a $50 gift is below some threshold. They jumped through all sorts of hoops to send an Amazon gift card last year instead and not have it be taxable to the employees because it had an actual cash value. How does a $50k tax bill payment not have a similar tax treatment? If the company just gives you a car for your usage they are supposed to count that as a taxable benefit. Most times they give it for "business use only" but then don't check too closely.
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