When the last tax bill passed, there was a lot of press around the State and Local Tax Deduction, otherwise known as the SALT deduction. This deduction allows taxpayers and businesses to write off the amount of state and local taxes they pay to reduce their federal taxes. For residents of higher tax states, this was a huge deduction, but the most recent tax bill limited that deduction to $10,000. However, for New York closely held business owners, also known as pass-through businesses, they have been able to bypass this $10,000 limit.
Does it really make a difference?
Yes! New York business owners have used their pass-through entity taxes to avoid $11 billion in taxes. This is according to the New York Department of Tax and Finance. This is one-sixth of our state’s revenue, and at an average federal tax rate of 32%, these nearly 100,000 closely held businesses have been able to save more than $3 billion in federal taxes.
Pass-through?
For closely held businesses, the owners usually pass-through their income taxes past the entity level and pay taxes on their individual returns. Prior to the most recent tax change, this allowed for large deductions. Not so anymore with the new $10,000 maximum. However, New York has a pass-through entity tax, which allows business owners to shift their state income taxes from their personal tax returns, which are limited to the $10,000 deduction, back to their business, which does not contain that $10,000 deduction.
Not a closely guarded secret
For closely held business owners, this may come as a shock, if they have not been taking advantage of this loophole created by our legislature soon after the SALT deduction was modified by the federal government. Though, New York’s Department of Tax and Finance is doing all it can to help business owners dodge the new federal SALT rules, especially as legal challenges have been largely unsuccessful and SALT rule changes have not been able to get majority consensus in congress. These creative state-level taxing schemes passed quickly in our state to help business owners avoid large tax bills, and many other higher tax states (22 to be exact) are moving or have already moved to similar tax schemes as well.