State-Specific Tax Updates

State and Local Tax (SALT) Workarounds

Late in 2020, the IRS issued guidance that paved the way for states to enact state and local tax (SALT) workaround deductions for individual owners of passthrough entities. If you live somewhere with high state and local taxes (hello, California and New York), you are likely very familiar with the $10,000 federal income tax deduction limit that was implemented by the Tax Cuts and Jobs Act of 2017. The following states approved SALT workarounds earlier this year: Alabama, Arkansas, Connecticut, Louisiana, Oklahoma, Maryland, Rhode Island and Wisconsin. Idaho and New York recently passed legislation; Arizona and Georgia are close; and California, Illinois, North Carolina, South Carolina and Massachusetts are working on it. Generally speaking, taxes are being imposed and deducted at the passthrough entity level, which reduces the taxable income that flows to individual owners of passthrough entities.

Many expected a speedy repeal of the $10,000 federal income tax deduction limit by the Biden Administration, but a new report issued by the Institute on Taxation and Economic Policy could give them further pause: “The repeal of the SALT cap without other reforms [could] worsen economic disparities and exacerbate racial inequities [that are] baked into the federal tax system.” The study goes on to estimate that “72% of the benefit of [the] SALT repeal would go to white households.” Eek! Don’t expect a SALT repeal to occur any time soon.

California’s Partial PPP Conformity Bill Sent to the Governor

The California General Assembly recently sent Assembly Bill (AB) 80, Coronavirus Aid, Relief, and Economic Security Act: Federal Consolidated Appropriations Act, 2021, to Governor Gavin Newsom, ending two months of uncertainty surrounding the subject. AB 80 partially conforms to the federal treatment of PPP loan forgiveness and EIDL grants, with one major exception: taxpayers must have a 25% reduction in gross receipts in any 2020 calendar quarter as compared to the comparable 2019 calendar quarter in order to deduct eligible expenses associated with PPP loan forgiven amounts. If the threshold reduction is not met, the eligible expenses cannot be deducted on the California tax return. AB 80 mirrors the same 25% gross reduction threshold that is required for the second draw of PPP loans.

Previously, AB 80 included a proposed $150,000 cap on business expense deductions and a cap of the same amount on the carryforward of net operating losses that would result from using the deductions.

Sources: Bloomberg Tax, RIA Checkpoint, Institute on Taxation and Economic Policy, California Legislative Information