Treasury and IRS to Issue SALT Cap Workaround Regulations

The proposed regulations will clarify that pass-through entities are not subject to TCJA’s state and local tax cap. 

November 13, 2020

WASHINGTON—The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a notice on November 9 indicating the agencies intend to propose regulations clarifying that state and local taxes can be imposed on pass-through entities at the entity level. This clarification will serve as a workaround for the $10,000 state and local tax deduction cap for individuals.

In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which significantly reformed the tax code. In order to temper the cost of such a robust tax cut, Congress included a provision that limits the deduction of state and local taxes to $10,000 for individuals. By allowing a pass-through entity to pay state and local taxes at the entity level, an individual will no longer need to remit the taxes thus avoiding the deduction limit. 

“The Department of the Treasury and IRS are taking the necessary steps to provide fairness for America's small businesses,” Treasury Secretary Steven Mnuchin said in a press release that accompanied the notice. “These proposed regulations will offer clarity for individual owners of pass-through entities.”

The notice further indicates the forthcoming proposed regulations will be effective for payments made on or after November 9. Six states have an entity-level tax: Connecticut, Louisiana, New Jersey, Oklahoma, Rhode Island and Wisconsin. The forthcoming regulations may lead to a wave of state tax laws imposing an entity-level tax on passthrough entities. Under the proposed regulations, taxpayers may apply the new rules back to the date that their state had the entity-level tax in place.

NACS applauds the notice issued by Treasury and the IRS and will alert members when the regulations are proposed.