Year End Planning Opportunity for Owners of Pass-through Entities

As some of you may know, Massachusetts recently enacted a new provision to the state’s tax code that allows for owners and beneficiaries of pass-through entities (Partnerships or S-Corporations) to deduct state taxes beyond the $10,000 limit currently imposed by the Tax Cuts and Jobs Act. In essence, this provision allows for you to have your business pay some of your personal state taxes, which are deductible on the federal returns and not subject to the $10,000 cap. Payments would need to be made from the business account by December 31st of this year.

 

We have been monitoring this in the office since the middle of August when this was first brought froward in the Massachusetts Congress. With President Biden’s tax plan looming, we have been hesitant to discuss this with clients as there is a possibility that this will become null and void. The way that the bill is written, there is a provision that says if the State and Local Tax (SALT) Cap is lifted beyond the $10,000 limit, then this law is disregarded. All sides seem to agree that the SALT limit needs to be increased, but Congress cannot decide on how much, for who, and when (the Senate’s version of the Build Back Better Bill is 1,180 pages long and does not even begin to tackle this issue).

 

Knowing this, there are a few scenarios that could play out:

  • No Change to the SALT Cap: this is fully available to Massachusetts’ pass-through entities.

  • The SALT Cap is lifted beyond $10,000 for tax years starting in 2022: this is fully available to Massachusetts’ pass-through entities for 2021 only.

  • The SALT Cap is lifted beyond $10,000 for tax years starting in 2021: this is fully disregarded and any payments made would end up being returned to the business when you file the business tax return.

 

Unfortunately, not only do we not know when or if this will even pass, we do not know if this change will be retroactive (i.e. Congress passes the tax bill on January 15th, 2022 and makes the legislation for tax years starting January 1st, 2021). There is a risk that you will make these payments and that by the time it comes to file your return Congress has completely changed the laws (according to the Supreme Court of the United States, taxpayers have no vested interest in the Internal Revenue Code and therefore Congress can change it at any time).

 

We have run a few sample numbers here in the office and in most situations this is beneficial to your overall tax bill. If you would like to learn more about this, please let me know as soon as possible, the due date to take action on this is December 31st. This is considered an additional service offering and is subject to an additional fee.

Abbott and Company .