As many of you are aware, the deduction for state and local taxes (SALT) is limited to $10,000 on an individual’s income tax return. Many states have passed laws to workaround this limitation and have the tax paid and deducted at the entity level. On May 17, South Carolina became one of those states.
Per Bill S627, partnerships and S corps may elect to have their active trade or business income taxed at 3% and paid by the entity. The tax paid would then be deductible by the entity. The election must be made by the due date of the entity’s return, including extensions, and the election is applicable for tax years after December 31, 2020.
An important item to note is the entity can only pay tax on active trade or business income. This has not been expressly defined, but we are assuming that it follows the same guidelines as for individuals. This means that we do not expect most rentals or any guaranteed payments to qualify.
While we are still waiting on more detailed guidance, this entity-level tax will provide a nice deduction for many business owners who have had their SALT deductions limited. With potential tax reform there is a chance the SALT cap will be eliminated or modified. If that happens, this workaround could be for naught. We will keep you updated as we learn more.
Your TLG Team
