On Monday, the IRS announced that it will be issuing proposed regulations allowing partnerships and S corporations to deduct state and local income taxes in full. Under the Tax Cuts and Jobs Act, individual taxpayers are currently limited to a state tax deduction of $10,000, annually (otherwise known as the “SALT cap”). Some states, including New Jersey, Connecticut and several others have enacted a so-called “workaround” of the SALT Cap, either mandating or allowing business entities to elect that state tax be paid by the business rather than the business owners in order to maintain the full federal tax benefit of state taxes.
In the announcement, the IRS indicated that the forthcoming regulations will treat these types of state tax payments as deductible and thereby reducing the federal income passed through to the owners. The IRS also clarified that they will respect the deduction whether the business level state tax is mandated or elected into. This announcement is a welcomed clarification from the IRS, will alleviate much of the uncertainty surrounding these SALT Cap workarounds enacted by certain states and may result in other states introducing similar tax regimes.