CA SALT workaround for Pass throughs

I have not seen a great written write up, but Spidell has an awesome 3 minute or so pod cast on the new work around for the $10K State and Local tax limitations. I am shocked that the IRS is on board. I guess the positive side is clients will have to get their books in order before the due date. https://www.caltax.com/news/podcast/pod ... ntity-tax/

So I imagine the first thing I need to do has stop clients from paying any more CA estimates and pay in via the new regimen.

And tell them to be sure the books are done by year end so we can file on time.

Granted, I imagine Biden will change the SATLT cap making the new law invalid.

Fascinating.

I am shocked that the IRS is on board.

Same. I honestly wonder if approval of this strategy was political - a way to work against the tax law enacted during the Trump administration.

And it is a blatant tax cut for the wealthy. Nobody cared that the middle class did not get their state and local deductions because of the AMT pre Trump. Now that the limousine liberals are being gored, they can't have that.

We need to be careful or we will be moved to pfz. Here is another benefit for the high income taxpayer: this treatment avoids the AMT impact, which of course worked against those with big state tax deductions and therefore, we can presume, high incomes. This isn't just a workaround the current law - it is better than the old law for the high income taxpayers who live in high tax states.

How does it help the high income W-2

Hope that CA releases the necessary forms for this in a timely manner. MD passed a similar law in late 2020. We just got the forms on June 29, 2021. Then, of course, the software companies have to program it.

Sole proprietors should get a 1% partner to create an entity or become an S corp.

Also, this will provide additional temptation for S corp shareholders to low ball the wages they pay themselves from the corp.

I have not seen a great written write up, but Spidell has an awesome 3 minute or so pod cast on the new work around for the $10K State and Local tax limitations. I am shocked that the IRS is on board. I guess the positive side is clients will have to get their books in order before the due date. https://www.caltax.com/news/podcast/pod ... ntity-tax/

Same. I honestly wonder if approval of this strategy was political - a way to work against the tax law enacted during the Trump administration.

The IRS had begun the process of allowing the state SALT workarounds during the Trump Administration when states like Wisconsin set up similar regimes. Given the way existing tax law was written and the specific changes made by the TCJA, it would be a political move to not accept these.

I strongly disagree. Just because the acceptance began during the Trump years doesn't mean that it was not politically motivated. There were plenty of forces within the administration working against anything Trump during those years. The IRS should no longer be allowed to challenge anything under substance over form or any of the other doctrines that it uses to collapse supposedly separate steps into one transaction.

And it is another screwing of the wage earner. Business expenses are deductible; employee business expenses are not. State taxes on wage income are subject to limitation; move those taxes to an entity, and they become deductible and not even subject to AMT. The fact that the forces in power can get away with this speaks to the complexity of the Code, the inability of those not specifically educated in this area to understand, and the silence of the media, which has the power to educate but does not.

This is good for Trump's many business interests and Biden's S corporation.

Trump is a Florida resident.

I suspect that he has multi-state businesses.

I strongly disagree. Just because the acceptance began during the Trump years doesn't mean that it was not politically motivated.

The way the law was written, there was no option but to rule this way, and to rule in a different manner would be political. My point is that whomever was in decision-making positions at the Treasury during the Trump Administration made the correct ruling, whether it was in alignment with their own personal politics or not, and the IRS is continuing to make the correct ruling under the Biden Administration.

The IRS should no longer be allowed to challenge anything under substance over form or any of the other doctrines that it uses to collapse supposedly separate steps into one transaction.

This is ridiculous on its face. This is not a taxpayer attempting to take multiple steps to avoid taxation; it's about a state making its own laws and tax elections and how the IRS evaluates the state statute under federal law.

For decades prior to TCJA, Wisconsin has allowed federal S corporations to elect to be taxed in Wisconsin as a C corporation. Likewise, there are states which have long required a separate S corporation election to be filed and if a federal S corporation does not make the state election, it is a C corporation under state law. And many states have long levied taxes based on a business' income, receipts, net worth, property, etc. In each of these cases the taxpayer would have rightfully had a deduction for state taxes on the federal business return. So if a state enacts a new tax on business income that is in alignment with existing tax law deductions, it's entitled to a federal deduction, even if it's being done as a reaction to a federal law. To rule otherwise would be to attempt to override the ability for states to enact taxes at all (in the case of CT's pass-through tax) or to even limit the ability for states to create tax elections (in the case of WI and CA).

To use an example that is a bit less politically charged, Wisconsin lawmakers would have been aware of what the federal tax consequences would be when it converted from a separate property state to a community property state in 1986. Would it have been right for the IRS to say that WI taxpayers should be denied the double step-up in basis of marital property because the law is new? Or, to use an example maybe more familiar to you, would it be correct for the IRS to deny community property treatment for those who choose to enter into registered domestic partnerships under CA law?

And it is another screwing of the wage earner.

I don't disagree with that. But, that's how the TCJA was written shrugs shoulders

Massachusetts just passed a workaround as well but I question if it will stand up.

1. It is optional, you can either elect in or not on an annual basis

2. They put this language in there.

The pending PTE tax and credit regime would not apply to any taxable years for which the federal SALT deduction limitation has expired or is otherwise not in effect.[15]

The way the law was written, there was no option but to rule this way, and to rule in a different manner would be political.

I strongly disagree. I don't see how you can come to that conclusion. But I will refrain from calling your opinion ridiculous.

I strongly disagree. I don't see how you can come to that conclusion.

§164.

Is there somehow a double count of benefit here? Once with receiving a lower K-1, second with a credit on the 1040?

It shouldn't be a double in that sense of what you're asking. The Federal K-1 will have lower income due to deduction (no credit related to this). The State K-1 will have higher income (the deduction added back) and a pass-thru credit for the partner to claim. The taxpayer's 10K SALT limit can be used against his real estate taxes, and not other state income taxes.

For some with multiple state returns; there's a "double" benefit, because you don't have to pay CA state tax (just claim the credit as the individual), and on your resident state, put that same credit/tax assessed as "Other State Taxes." But in the end it isn't a double benefit, since the taxpayer will pay CA taxes after all (just through their entity).

...put that same credit/tax assessed as "Other State Taxes."

This is not my understanding of how the out of state tax credit works.

If your CA taxes are reduced to zero by the PTE credit, your resident state's out of state tax credit will use $0 as your taxes paid to CA on the "double taxed" income. You end up paying the full tax to your resident state. This would make consenting to the CA PTE a bad choice.