Close

December 7, 2021

How to Take Advantage of the SALT Deduction Workaround

There is a new tax deduction available S-corporations and Partnerships to deduct for pass-through entity (PTE) withholding for its owners starting in 2022! 

At KDP, we are focused on the legislative changes that affect your bottom line and committed to ensuring you are sustaining and improving your tax efficiency. In 2017, the Tax Cuts and Jobs Act of 2017 introduced a $10,000 limit on the amount of state and local taxes (SALT) an individual taxpayer can deduct for federal income tax purposes. This limitation undercut the consolation deduction at the federal income tax level which higher income taxpayers utilized to soften tax burden of income being double taxed by state governments—or triple taxed by local governments in some cases.  Considering this negative impact, the IRS issued a notice on 11/10/2020 allowing a SALT deduction for PTE withholding payments made by S corporations and partnerships in calculation of taxable income. 

In response to the allowance of the SALT deduction at the entity level, most states including Idaho, Oregon, and California passed legislation to allow elective PTE tax. Previously, PTE payments were only allowed for certain owners, which disqualified resident individual owners from making a payment.  This created an enormous opportunity for everyday business owners to maximize their SALT deduction.  

How to take advantage of the new legislation:

For Idaho: 

  • Engage KDP to assist you in preparing and sending an estimated PTE payment for your S corporation or partnership prior to 12/31/2021.   Note, to take a deduction for your 2021 taxes, you must make the payment prior to year-end. 
  • Example, Jane and John are 50/50 partners in their profitable, 100% Idaho business.  Their share of business income is $200,000, in which the partnership makes PTE payments of $13,000 for each partner.  The partnership gets a deduction of $26,000 which exceeds the previous $10,000 SALT limitation imposed at the individual 1040 return level.   Jane and John claim the PTE payment on their individual returns similar to withholding, with any excess payment resulting in a refund.
  • We will primarily utilize the 2020 S corporation or partnership income information to calculate an estimated PTE payment for each shareholder or partner. 
  • Note, the payments must be made at the partnership or S corporation level, and made to the corresponding state taxing agency.  Individual estimated payments made throughout the year cannot be reclassified. 

For Oregon:

  • Engage KDP to assist you in preparing and sending an estimated PTE payment for your S corporation or partnership in 2022. 
  • We will primarily utilize the 2021 S corporation or partnership income information to calculate an estimated PTE payment for each shareholder or partner, or utilize your actual book income.
  • Note, the payments must be made at the partnership or S corporation level, and made to the corresponding state taxing agency.  Individual estimated payments made throughout the year cannot be reclassified. 

For California:

  • Make an election on a timely filed 2021 tax return. Please schedule a call with us to ensure we can timely file the return and plan to submit the initial payment by June 15.
  • Note, the payments must be made at the partnership or S corporation level, and made to the corresponding state taxing agency.  Individual estimated payments made throughout the year cannot be reclassified. 

We are poised to help you get the most out of this deduction.  Please contact us to begin the process.   

We value your trust and confidence in us and sincerely appreciate you!   

Your Team at KDP 

Katie LawsKatie Laws, CPA
KDP Tax Manager

Katie Laws, CPA, has 11 years of tax experience with areas of expertise including GL accounting, STAT accounting, GAAP investment accounting, CGAAP, and advanced spreadsheet analysis. She has led General Ledger management and calculation troubleshooting for accounting directors ($500 million – $150 billion AUM). She also served the Idaho State Tax Commission for 6 years as a Tax Auditor 3.