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Elective State Pass-Through Taxes Remain Questionable

Law360 Tax Authority

Whether the Treasury Department and Internal Revenue Service will ultimately bless the use of entity-level taxes on pass-throughs, meant as a workaround to the $10,000 SALT deduction cap, remains uncertain even as more states slowly move to adopt them.

Treasury and the IRS have had a lot to say about efforts to give residents and businesses a workaround to the state and local tax deduction cap imposed by the Tax Cuts and Jobs Act (115 P.L. 97), releasing frequent and detailed guidance on a number of other workaround techniques. As recently as August, final rules allowed businesses to deduct contributions (2020 Law360 220-147) to a charitable entity as a trade or business expense rather than as a charitable contribution.

But on the creation of entity-level taxes on pass-throughs, a way for limited liability company members, S corporation shareholders and partners in partnerships to avoid the cap, the IRS and Treasury have remained silent, (2019 Law360 249-41) leaving tax professionals to question whether these taxes will be respected as a matter of policy. Complicating the matter is the upcoming election: If the White House and Senate flip to Democratic control, the SALT cap may be mitigated or even eliminated.

“I think the jury is still out on whether or not these really are viable,” said Irwin Slomka, senior tax counsel at Blank Rome LLP. “If given the choice, taxpayers [may] not want to be subjected to a brand new tax — with the complexities and possible costs and with [difficulties in] complying.”

“Elective State Pass-Through Taxes Remain Questionable,” by Maria Koklanaris was published in Law360 Tax Authority on October 16, 2020.