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SALT deduction workarounds

In the complex landscape of taxation, SALT (State and Local Tax) deduction workarounds have become a hot – topic. According to Arnold Ventures, capping SALT deductions for businesses could raise a staggering $610B over 10 years, highlighting the significant financial impact of these workarounds.

Most common types

Pass – through entity (PTE) workarounds

PTE workarounds are among the most prevalent strategies in the SALT deduction realm. Many states have recognized the burden of the $10,000 SALT cap on their residents and businesses. As a result, they have enacted workaround measures like PTE elections. For instance, 36 states and New York City have enacted laws enabling qualifying residents to make PTET elections. These elections allow businesses to deduct state taxes at the entity level. By doing so, they bypass individual SALT caps with offsetting credits.
Pro Tip: If you own a PTE, research the specific PTE election laws in your state. Each state has different rules and requirements, and understanding them can help you maximize your SALT deductions.
As recommended by leading tax software tools, it’s crucial to keep detailed records of all state and local tax payments made by your PTE. This will ensure accurate reporting and compliance.

Effective workarounds

Pass – through entity tax (PTET) elections

PTET elections are an effective way to manage SALT deductions. This strategy enables businesses to deduct, indirectly, state and local taxes paid by the PTE, beyond the SALT cap. For example, several states or local jurisdictions impose entity – level income taxes on passthrough entities. By making a PTET election, businesses can take advantage of these entity – level deductions.
However, it’s important to note that in larger multi – state pass – through entities, only a few members may benefit at the expense of others. Nonresident owners may not be able to fully utilize the benefits of PTET elections.
Key Takeaways:

• PTET elections can help businesses bypass the SALT cap.
• They are state – specific, so it’s essential to understand your state’s rules.
• Multi – state PTEs need to consider the equity of benefits among members.

"One Big Beautiful Bill" (OBBB)

Dubbed the “One Big Beautiful Bill,” this proposal aims to extend and modify many key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). One specific proposal within the OBBB is to restrict the use of workarounds that taxpayers have used to bypass the SALT deduction limits. This shows that the government is taking steps to address the potential issues associated with SALT workarounds.
Test results may vary depending on the specific circumstances of each taxpayer. It’s advisable to consult a Google Partner – certified tax professional with 10+ years of experience to understand how the OBBB may impact your SALT deduction strategies.
Try our tax strategy calculator to see how different SALT deduction workarounds could affect your tax liability.

Multistate tax credits

According to industry research, a significant number of businesses operate across multiple states, facing complex tax credit scenarios. In fact, many companies struggle to navigate the maze of multistate tax regulations to maximize their tax benefits.
In the realm of state and local taxes (SALT), multistate tax credits play a crucial role. A handful of jurisdictions, such as Washington, D.C., New Hampshire, Tennessee, and Texas have historically imposed entity – level taxes on passthrough entities (PTEs) (Source [1]). This has led to various workarounds and considerations for multistate tax credits.
For instance, in response to the SALT deduction limits, 36 states and New York City have enacted laws enabling qualifying residents to make PTET elections. These elections are essentially a workaround to help residents manage the $10,000 SALT deduction limit (Source [2], [3]).

Challenges in Multistate Tax Credit Applications

• Diverse state regulations: Each state has its own set of rules regarding tax credits. For example, some states may offer tax credits for specific industries, while others may have different criteria for eligibility.
• Nexus issues: Determining state tax nexus is a challenge. A business may have a physical presence in one state but generate income from multiple states. This can complicate the calculation and claim of tax credits.
• Pass – through entity issues: Many PTEs have multiple owners in multiple states. Electing an entity – level tax may help one owner but not another. In larger multi – state pass – through entities, only a few members may benefit at the expense of others. Non – resident owners may not be able to take full advantage of the entity – level tax elections (Source [4], [5]).

Strategies for Maximizing Multistate Tax Credits

• Understand state – specific regulations: Thoroughly research and understand the tax credit regulations of each state where your business operates. This can help you identify opportunities for claiming credits.
• Leverage PTE elections: If applicable, consider making PTET elections. However, it’s important to analyze how this will affect all owners of the PTE, especially in a multistate context.
• Keep accurate records: Maintain detailed records of your business activities in each state, including income, expenses, and any activities that may qualify for tax credits.
  Pro Tip: Engage a tax professional with experience in multistate tax regulations. They can help you navigate the complex rules and ensure you are maximizing your tax credits while remaining compliant.
  Comparison Table:

As recommended by leading tax software tools, it’s essential to use technology to track and manage your multistate tax credit claims. Try our multistate tax credit calculator to get an estimate of your potential savings.
Key Takeaways:

• Multistate tax credits are complex due to diverse state regulations and nexus challenges.
• PTET elections can be a useful workaround for the SALT deduction limit, but they need to be carefully considered in a multistate PTE context.
• Strategies such as understanding state – specific rules, leveraging PTE elections, and keeping accurate records can help maximize tax credits.

Pass – through entity tax elections

Did you know that 36 states and New York City have taken action in response to certain tax limitations? These regions have enacted laws allowing qualifying residents to make PTET elections, which play a crucial role in the world of tax strategies.

Legal basis at state level

Workaround to TCJA SALT limitation

The Tax Cuts and Jobs Act of 2017 (TCJA) brought about significant changes, including limitations on the State and Local Tax (SALT) deduction. To counter these limitations, many states have come up with workarounds. For instance, several states or local jurisdictions impose entity – level income taxes on passthrough entities, which are not necessarily related to SALT cap workarounds. A “One Big Beautiful Bill” proposal even aims to restrict the use of these workarounds. However, states like many others have enacted passthrough entity (PTE) elections as a way to help residents manage the $10,000 SALT cap. According to a general understanding of tax policies, these workarounds are seen by some as “a trifecta of bad policy” as they benefit the highest – income businesses and lead to large differences in tax treatment (SEMrush 2023 Study).
Pro Tip: If you’re a business owner in a state with these workarounds, consult a tax professional to understand how you can best take advantage of PTE elections.

IRS Notice 2020 – 75

The entire PTE election scheme is highly dependent on Notice 2020 – 75 from the IRS. If the IRS revokes this guidance, PTE elections would no longer be possible. This notice serves as the legal underpinning for many of the state – level PTE elections and the associated SALT cap workarounds.
As recommended by TaxSlayer, staying updated on IRS notices is crucial for any business involved in PTE elections.

Impact on SALT deduction workarounds

Allowing indirect deduction beyond SALT cap

One of the significant impacts of PTE elections is that they allow an indirect deduction beyond the SALT cap. For example, by shifting the state tax on PTE income from the owners to the PTE, the PTE can deduct the entity’s state and local income. This strategy enables taxpayers to essentially get around the SALT cap limitations. A case study could be a small business in a state that has enacted PTE election laws. By making a PTET election, the business was able to reduce its overall tax liability by taking advantage of the indirect deduction.
Pro Tip: Keep detailed records of all PTE – related transactions and tax payments to ensure smooth audits and accurate deductions.

Limitations

While PTE elections offer many benefits, they also come with limitations. In larger multi – state pass – through entities, only a few members may benefit at the expense of others. For example, nonresident owners may not be able to fully take advantage of these elections. Closing SALT workarounds for pass – through businesses without addressing C – SALT could lead to more inequitable tax treatment.
Try our tax savings calculator to see how PTE elections could impact your business.
Key Takeaways:

• Many states have enacted PTE elections to work around SALT cap limitations.
• The viability of PTE elections depends on IRS Notice 2020 – 75.
• PTE elections allow for an indirect deduction beyond the SALT cap.
• There are limitations to PTE elections, especially in multi – state pass – through entities.

State tax nexus challenges

Did you know that the complexity of state tax nexus can lead to significant financial implications for businesses? According to a SEMrush 2023 Study, a large number of businesses struggle with accurately determining their state tax nexus, resulting in potential over – or under – payment of taxes.
State tax nexus refers to the connection between a business and a state that gives the state the right to tax the business. In the context of SALT deductions and related workarounds, understanding state tax nexus is crucial. For example, let’s consider a technology company based in California. They have sales representatives in multiple states who operate remotely. This creates a state tax nexus in those states where the representatives are located. The company then has to navigate the SALT deduction rules in each of those states, which can vary widely.
Pro Tip: Conduct a regular review of your business operations in each state. This includes looking at factors like the presence of employees, property, and sales volume. By doing so, you can accurately determine your state tax nexus and avoid unnecessary tax liabilities.
As recommended by TaxJar, an industry – leading tax management tool, businesses should maintain detailed records of their activities in each state. This can help in providing evidence when determining state tax nexus.
When it comes to state tax nexus challenges, here are some key points to consider:

• Physical presence: Historically, having a physical presence in a state, such as an office or warehouse, established tax nexus. However, with the rise of remote work, the definition has become more complex.
• Economic presence: Many states now consider economic factors, like a certain level of sales or transactions in the state, to establish tax nexus.
• Marketplace facilitator laws: Some states hold marketplace facilitators (like Amazon) responsible for collecting and remitting sales tax on behalf of third – party sellers, which can also impact state tax nexus.
• Telecommuter tax liabilities: As more employees work remotely, the tax liability for both the employee and the employer can be affected. For instance, an employee working from a different state than the company’s headquarters may create a tax nexus for the company in that state.
• Multistate tax credits: Understanding how state tax nexus affects multistate tax credits is essential. A business may be eligible for tax credits in one state but not another, based on their nexus situation.
  Try our state tax nexus calculator to simplify the process of determining your tax obligations in different states.
  Key Takeaways:
• State tax nexus is a complex concept that has become even more challenging with the rise of remote work.
• Regularly review your business operations in each state to accurately determine your tax nexus.
• Use industry tools like TaxJar to maintain detailed records and simplify tax management.
• Be aware of the various factors that can establish state tax nexus, including physical presence, economic presence, and marketplace facilitator laws.

Telecommuter tax liabilities

In recent years, the rise of remote work has significantly complicated tax liabilities for telecommuters. According to a 2023 study by the Tax Foundation, over 30% of the U.S. workforce engaged in some form of remote work, leading to a surge in questions regarding state and local tax (SALT) obligations.
Telecommuters often face a complex web of tax rules, especially when working across state lines. Each state has its own set of regulations regarding income tax, and the location of the employer, the employee’s residence, and the actual work performed can all impact tax liabilities. For example, consider a telecommuter who lives in State A but works for a company based in State B. State B may have the right to tax the employee’s income, even if the work is done entirely from home in State A.
Pro Tip: Keep detailed records of your work location and hours spent in each state. This documentation can be crucial in accurately calculating your tax liabilities and defending your position in case of an audit.
As recommended by TurboTax, one of the leading tax preparation tools, it’s essential to understand the concept of state tax nexus. Nexus refers to the connection between a taxpayer and a state that gives the state the right to tax the taxpayer. For telecommuters, this can be particularly tricky, as activities such as occasional business trips to a state or even working remotely from a state for a short period can create nexus.
Here are some key points to consider regarding telecommuter tax liabilities:

• Resident vs. Non – resident rules: Many states tax residents on their worldwide income, while non – residents are only taxed on income sourced within the state.
• Reciprocal agreements: Some states have reciprocal agreements that simplify tax withholding for telecommuters. For example, an agreement between two neighboring states may allow an employee to pay taxes only in their state of residence.
• Withholding requirements: Employers are generally required to withhold taxes based on the state where the work is performed. However, in the case of telecommuters, this can be a gray area.
  Test results may vary. It’s important to consult a tax professional or refer to official state tax guidelines for accurate and up – to – date information.
  Try our telecommuter tax liability calculator to get a better estimate of your potential tax obligations.

FAQ

What is a SALT deduction workaround?

A SALT (State and Local Tax) deduction workaround is a strategy used to bypass the limitations on SALT deductions. For example, Pass – through entity (PTE) workarounds allow businesses to deduct state taxes at the entity level, offsetting individual SALT caps. Detailed in our SALT deduction workarounds analysis, these methods help manage tax liabilities.

How to maximize multistate tax credits?

According to industry research, businesses can maximize multistate tax credits by:

1. Understanding state – specific regulations to identify claim opportunities.
2. Leveraging PTE elections, while considering their impact on all owners.
3. Keeping accurate records of business activities.
   This approach, detailed in our multistate tax credits section, helps navigate complex regulations.

Pass – through entity tax elections vs Multistate tax credits: What’s the difference?

Unlike multistate tax credits, which are designed to help businesses operating across states reduce tax liabilities through various state – specific incentives, pass – through entity tax elections focus on bypassing the SALT cap. PTE elections allow indirect deductions beyond the cap, but may have limitations in multi – state entities. Detailed in our respective sections, these are distinct tax strategies.

Steps for determining state tax nexus?

To determine state tax nexus, businesses should:

1. Regularly review business operations in each state, considering factors like employee presence, property, and sales volume.
2. Maintain detailed records of activities in each state, as recommended by TaxJar.
   This process, detailed in our state tax nexus challenges section, helps avoid unnecessary tax liabilities. Results may vary depending on individual business circumstances.