On May 7, the governor of Maryland enacted SB 523 – Income Tax—Pass-Through Entities and Corporations. This new legislation aims to provide relief for taxpayers from the $10,000 cap on federal deductions for state and local taxes (SALTs). SB 523 goes into effect on July 1, 2020 and applies to tax years 2020 and beyond.
SB 523 was created in response to a change made by the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA capped the individual deduction for state and local taxes at $10,000 for tax years 2018 through 2025.
The workaround created by SB 523 functions by allowing pass-through taxpayers to elect to use an entity-level income tax—the SALT cap does not apply to taxes paid by entities. In effect, the entity pays the state income tax for Maryland resident owners, and the individual Maryland owner receives credit on their personal Maryland tax return for this payment. Because the company pays the state income tax, it is treated as a deduction on the company’s federal tax return, which is not subject to the individual $10,000 state and local tax cap.
Maryland is not the only state to create a pass-through workaround for the SALT deduction. Connecticut, Louisiana, New Jersey, Oklahoma, Rhode Island, and Wisconsin have also enacted similar legislation. It is not clear at this point whether SB 523 and similar legislation from other states will withstand IRS scrutiny.
Are you wondering if this new workaround could be applicable to your situation? Contact a HeimLantz tax advisor today for help minimizing your tax liability.