Author: Matthew T. Fuller
On Sunday May 30th, the Illinois General Assembly passed Senate Bill 2531 which would provide owners of a partnership or S corporation with a workaround to the federal $10,000 state and local tax deduction cap applicable to individual taxpayers. The legislation now goes to Governor Pritzker who is expected to sign the legislation into law, effective for tax years ending on or before December 31, 2021. This FGMK article provides an overview of the new tax SALT workaround provision and issues to consider when analyzing its application.
Before the 2018 tax year, an individual taxpayer could deduct an unlimited amount of state and local tax (“SALT”) payments for federal income tax purposes. As a result of the Tax Cuts and Jobs Act of 2017, beginning with the 2018 tax year, an individual can deduct no more than $10,000 of such taxes paid.
In response to this cap on the deductibility of SALT, Illinois, along with about a dozen other states, has devised a workaround involving a 4.95 percent entity-level tax that is creditable against the owners’ personal Illinois taxes. Late last year, the IRS opened the door for this type of strategy under Notice 2020-75.
For federal tax purposes, the pass-through entity (“PTE”) deducts the Illinois state tax when calculating its taxable income, thereby reducing each partner’s or shareholder’s share of the taxable income. A PTE is not subject to the SALT deduction cap, so it deducts the Illinois tax in full. It should be noted an individual partner or shareholder does not take into account the state tax that the PTE pays when applying the SALT deduction limitation to which the individual is subject.
