State and Local Tax Cap Circumvention

by: Michael L. Salad and Craig Panholzer

The Tax Cuts and Jobs Act of 2017 capped state and local tax (“SALT”) deductions at $10,000. This cap only applied to SALT deductions paid by individuals, not by business entities. The cap placed pass-through entities such as limited liability companies (“LLC”), partnerships, and S corporations at a disadvantage because SALT imposed on pass-through entity income is generally paid by LLC member(s), partner(s) or shareholder(s) (collectively, “Owners”), as opposed to being paid at the entity level. SALT deductions that passed through to individuals were subject to the $10,000 SALT cap.

However, on November 9, 2020, the Internal Revenue Service (the “IRS”) published Notice 2020-75, which states that regulations will be promulgated that will permit an entity-level tax to be offset by a corresponding individual income tax credit.

Several states have enacted legislation that allows businesses to pay state income taxes at the entity level, rather than at the individual level. The legislation was primarily intended to aid Owners in circumventing the $10,000 SALT deduction cap. As of the date of this article, six states enacted an entity-level tax, including New Jersey, Connecticut, Oklahoma, Louisiana, Wisconsin, and Rhode Island.  This favorable tax treatment applies to income earned by a pass-through entity in a trade or business. However, future federal regulations may limit SALT deductions to income earned from an active trade or business and not apply to an Owner’s share of a pass-through entity’s passive investment income.

Additionally, IRS Notice 2020-75 states that an entity-level tax followed by an offset of a corresponding individual income tax credit will be permitted, regardless of whether the state entity-level tax is mandatory or elective. Connecticut is the only state among those six states that enacted an entity-level pass-through tax that is mandatory; the other five states allow an entity to elect to remit the entity-level pass-through tax and allow its Owners to receive  individual income tax credits. A mandatory state entity-level tax is a disadvantage to pass-through entities that are comprised of Owners who do not reside in the state and have little or no tax liability in the state.  Those Owners will be responsible for entity-level tax and would not have an in-state income tax burden to offset the entity-level tax. The New Jersey Gross Income Tax Act, N.J. Stat. § 54A:1-1 et seq., allows pass-through entities to elect to pay tax due on an Owner’s share of distributive proceeds. The Owners may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their respective share of distributive proceeds.

The United States Department of the Treasury will issue proposed regulations that clarify that businesses organized as LLCs, partnerships or S corporations that pay an entity-level state tax may deduct such state taxes. Owners should consult with a tax professional in addressing SALT related issues.

Michael Salad is a partner in Cooper Levenson’s Business & Tax practice groups. He concentrates his practice on estate planning, probate, asset protection, business transactions, mergers and acquisitions and tax matters. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida, New York, Pennsylvania, Maryland and the District of Columbia. Michael can be reached via e-mail at and via direct dial at (954) 889-1850.

Craig Panholzer is an associate in Cooper Levenson’s Business & Tax practice group in its Florida office. He concentrates his practice on business transactions, estate planning, probate, and tax matters. Craig may be reached via e-mail at and via direct dial at (954) 889-1856.