The TCJA imposed a $10,000 limitation on individual’s deduction for payment of state and local taxes in itemizing their deductions. For many high taxed states, this resulted in significant limitations on state income and property tax deductibility and resulted in an effort to find a workaround from the legislation to allow for deductibility. Most states that impose income tax developed a Pass-Through Entity Election (“PTE”) whereby individual owners and their pass-through entities could elect to pay the state income tax at the entity level, thereby resulting in a reduction (and deduction) of the entire amount of state income tax that would be imposed on such income.

This has been implemented on a state-by-state basis, meaning not every pass-through entity will realize the same benefit. Some states have allowed owners or partners to claim a credit for their share of the taxes paid by the entity, while others allow the owner or partner to exclude their distributive share of the entity’s income. Special consideration is needed when owners are residents of different states. At the end of 2022, 29 states plus New York City, have enacted a PTE tax. All states permit PTE as an election, except Connecticut which is mandatory, and most are irrevocable elections.

In addition to the potential SALT savings from making a PTE election., many U.S. businesses are becoming more exposed to state income taxes following the Supreme Court’s 2018 decision in South Dakota vs. Wayfair, Inc., which gave authority to many states to tax businesses on their e-commerce activities, despite having no physical presence to the state. The old rules for state income taxation (based more on physical presence) are changing, with a focus on businesses that have a nexus to the state based on where the customer receives the benefit of the product or services being provided. As states are becoming more aggressive with their enforcement activities in this area, we recommend reviewing your business operations as well as legal structure to mitigate SALT exposure.