Business tax deductions aren't hurt by IRS SALT rule
Monday, September 10, 2018
The hubby works on what he calls the Law of Two. Basically, he says, it takes (at least) two tries to get anything done properly.
I thought of his unofficial law as I read the Internal Revenue Service's clarification of one of its earlier clarifications.
Tax geeks already know I'm talking about the IRS and Treasury declaration a couple of weeks ago regarding state tax credit programs tied to taxpayer deduction of state and local taxes, referred to as SALT.
Less tax to deduct: The Tax Cuts and Jobs Act limits the itemized SALT deduction, which includes individual payments of state and local income and real estate taxes, to $10,000 per return.
That means some folks, especially those with high state income taxes and/or costly more-local property tax bills, now lose some of that deduction on their federal returns.
States, most notably the politically blue states of New York, New Jersey and most recently California, have or are working on programs that will let their residents recover the lost federal tax break.
Changing tax amount to deductible donations: The most popular approach is a state-sponsored charitable foundation that also provides donors a state tax credit. Such programs were popular pre-TCJA in many other less-tax-heavy jurisdictions to finance, among other things, educational endeavor.
Basically, the taxpayer payments toward SALT would go instead to the new state program, for which the taxpayers could get a tax credit on their state returns and also claim that payment as a federally tax-deductible charitable gift.
This works, in theory, because there's no cap under the TCJA on the federal tax break for donations to an approved charity.
The proposed new IRS/Treasury regs, however, essentially would gut these SALT deduction workarounds useless. The rule would require that the donating taxpayer subtract any state tax credit received for the so-called charitable gift from the amount paid to the new SALT program.
Business payments/donations questions: As the SALT change is still being hashed out — the rules are simply, at this point, a proposal, with an IRS hearing scheduled in early November to discuss any possible tweaks before a final reg is issued — another related issue already has arisen.
Yep, the hubby's Law of Two strikes again
This time it's in connection with how state tax credit programs are affected when businesses rather individual taxpayers take advantage of them.
In response to those concerns, the federal tax agency has clarified its earlier SALT clarification.
Business expenses exempted: The IRS says that the general business deductibility rule is not affected by the proposed SALT regs. Any such amounts a business pays or accrues in carrying out its operations remain federally tax deductible.
Specifically, the IRS says that its earlier SALT announcement notwithstanding, taxpayers who make business-related payments to charities or government entities in exchange for state and local tax credits don't need to worry about those amounts' federal tax deductibility.
The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense, according to the IRS.
The tax agency was compelled to make the official announcement after hearing from businesses worried about how the proposed regs would affect their deductions.
The first (OK only) question and answer on the IRS' associated SALT FAQ page also addresses this concern:
Does the proposed regulation governing contributions in exchange for state and local tax credits affect the ability of a business that makes a payment under such a program to deduct the payment as an ordinary and necessary business expense?
No, the proposed regulation addresses the deductibility of such payments as charitable contributions under § 170. It does not affect the availability of a business expense deduction under § 162. A business taxpayer making a payment to a charitable or government entity described in § 170(c) is generally permitted to deduct the entire payment as an ordinary and necessary business expense under § 162 if the payment is made with a business purpose. The rules permitting an ordinary and necessary business expense deduction under § 162 apply to a taxpayer engaged in carrying on a trade or business regardless of the form of the business.
Keep talking: So rest easy businesses. You're not the target of either the TCJA change or the IRS rule on how that new law's SALT deduction limit is enforced.
And individual taxpayers who still have issues with the law and the IRS' planned handling of it, also take heart.
Sometimes the agency does hear what you're saying and adjusts its actions accordingly.
You have until Oct. 11 to tell the IRS what you think of its SALT rule. My earlier post on the regs has details on how to get your thoughts to the agency.
There could be some hope, although realistically not a lot, that your ideas could be part of any tweaks to the SALT rule before it's finalized.
You also might find these items of interest:
- Treasury, IRS issue 199A business tax deduction guidance
- 4 states seek court help in ending limit on SALT deduction
- New tax law prompts moves from high- to lower-tax states
Here’s a novel idea: instead of raising taxes, how about cutting expenditures, audit all state agencies, cut back on lush union benefits and freeze the defined benefit plan and replace it with a 401K?
Posted by: Maria Robert | Wednesday, September 19, 2018 at 12:47 PM
kay this doesnt clarify at all. people in ct think the new pass thru entity tax will game the system. it doesnt.
so this post confuses even more. people in ct thinks it sanctions the go around of the individual salt limit.
if you are not familiar with it take a look. its an abomination. or look at the accounting today article by michael cohn where i am extensively quoted. circa aug 31.
Posted by: michael joseph knight | Wednesday, September 12, 2018 at 02:11 PM
Jim, I haven't seen the reports as to what the costs will be, but based on my years as a Congressional staffer, I know that numbers are crunched and then legislation crafted to work with those. I suspect that's how the $10,000 SALT cap came about. It was the limit, along with other costs of the temporary bills, that Congress could accept under the budget reconciliation process (that allowed for the Senate to pass with a simple majority). I agree with you. I'd love to see the various deduction limit permutations and what they mean, pro and con, to the Treasury's tax collection balance. Kay
Posted by: Kay Bell | Tuesday, September 11, 2018 at 03:13 PM
I still don't get why everyone in NY/NJ/CA are ok with paying exorbitant amount of state/local taxes, as long as they can deduct it on their federal taxes.
I also don't get why the $10k cap to begin with. Is there any justifiable reason, other than the Republicans to stick it to blue states? Anyone do a study as to the what the expected increase to federal gov't revenue due to SALT cap of (let's say) $10k vs $25k vs uncapped?
Posted by: Jim | Tuesday, September 11, 2018 at 07:22 AM