Pass-Through Tax Becoming the Latest SALT Cap Workaround Trend Still Waiting on Regulation Clarification

In May, Maryland became the seventh state to give members of pass-through businesses the option of paying income taxes at the entity level instead of on their personal income taxes. (Read the full article here.).

The IRS issued Notice 2020-75 in November, effectively accepting the use of entity-level pass-through taxes to circumvent the $10,000 SALT limitation at the individual level. They will be issuing proposed regulations to give further clarification on the issue.

WHAT THIS MEANS FOR YOU

The new law could result in significant tax savings for individuals who have been limited to the $10,000 cap on the state and local tax deduction by permitting this deduction at the entity level for federal tax purposes. This only applies to Maryland payments 7/1/2020 or later, as that is when the Maryland law took effect.

However, some details are still unclear at this point, both at the Federal and the Maryland level, on how this tax will be handled, and its effects on other aspects of the entity’s tax return. Such as:

  • What types of income Maryland will be taxing
  • Uncertain effects on S corporations with nonresident shareholders
  • Uncertainty as to the deductibility of Maryland tax paid on investment income (e.g. interest, dividends, capital gains)

We will not know the specific details until the Treasury issues the proposed regulations and Maryland issues instructions. As result, there are factors to be considered in whether your company should make these payments.

Each organization has its own peculiarities, and how your company may use this opportunity may vary from another entity. If you have questions on how this may impact your tax situation, please contact your KatzAbosch representative or contact us.

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