When the Tax Cuts & Jobs Act (TCJA) was signed into law in 2017, many sections of the tax reform law were heralded as representing a big break to businesses. But as the dust has settled from 2017, it’s clear other sections of the law have hurt businesses. The treatment of an important deduction for pass-through entities is one prime example.
The tax overhaul law set the cap on deductions for state and local taxes (SALT) on individual income tax returns used as itemized deductions to $10,000. The new law did allow deductions for state and local taxes incurred in the production of business income, provided that these taxes were paid by the entity and were not reimbursed to the owners. The problem for pass through entities is that the entity income taxes are currently not being paid by the entity, they are being paid by the individuals where they would be limited to the $10,000. But thanks to a significant amount of advocacy work this winter at the state Legislature by RISCPA members Grafton “Cap” Willey, IV and Randy Dittmar, RI businesses may be seeing relief by the conclusion of this legislative session.
Cap and Randy, highlighting problems with the impact of the new SALT deductions cap, outlined a proposal to House leadership to amend the state’s tax code that would allow a pass-through entity to elect to pay an entity level state income tax and pass a State tax credit for the taxes paid at the entity level down to the shareholder to be claimed against the taxpayer’s tax liability. Since this tax would be paid at the entity level, it would restore the deduction for Federal income tax purposes, helping many RI small businesses regain that deduction. The bill, H-5576, Pass Through Entity Tax Legislation, is now scheduled for a hearing before the House Finance Committee in late April. Cap Willey tells us how the amended provision will even the playing field.
“This legislation allows a pass-through entity to pay the state income tax at the entity level the same as a C-Corporation and deduct it from the federal income tax passed through to the owners,” Cap explains. “The net benefit is that it allows the pass-through entity to be treated the same as the larger C-Corporations on their income, which is only fair.”
Cap added the restored tax deduction remains revenue neutral to the state and is a cost to be absorbed only by the federal government. In addition to Cap and Randy’s advocacy efforts, the RI Society issued its own a letter of support for the legislation to Majority Leader Joseph Shekarchi.
RISCPA salutes Cap Willey and Randy Dittmar for their important tax advocacy efforts during this legislative season. They were recently named as recipients of our first ever Member Spotlight Award, introduced in February.