The latest discussions among Senate Republicans revolve around significant tax breaks that could reshape the financial landscape for many business owners. With the House endorsing the "One Big Beautiful Bill Act," it proposes key alterations to the state and local tax (SALT) deduction, potentially leaving some individuals at a disadvantage.
The "One Big Beautiful Bill Act" aims to elevate the federal deduction cap for state and local taxes to $40,000, phasing it out for individuals earning above $500,000. Additionally, the bill seeks to enhance the tax break for pass-through businesses, known as the qualified business income (QBI) deduction, increasing it to 23%. However, this proposition comes with a caveat: it would eliminate a popular workaround that some pass-through business owners currently utilize to circumvent the SALT cap.
Under the Tax Cuts and Jobs Act (TCJA) of 2017, a SALT deduction limit of $10,000 was established for those claiming itemized deductions. This limitation is set to expire after 2025 unless Congress intervenes. Previously, the SALT deduction had no cap, though it was mitigated for higher earners due to the alternative minimum tax.
This cap has been particularly burdensome for residents in high-tax states like New York, New Jersey, and California, where individuals can only deduct a maximum of $10,000 for SALT, covering income, property, and sales taxes.
In response to this challenge, many states have implemented a workaround that allows pass-through business owners to bypass the federal SALT deduction limit. As of early May, approximately 36 states and New York City have established a pass-through entity (PTE) tax since the TCJA’s SALT limitations. By paying state and local taxes through a pass-through business, owners can avoid the $10,000 cap and deduct their share of SALT payments.
Specific professions termed "specified service trades or businesses" (SSTBs)—including doctors, lawyers, and accountants—are unable to claim the QBI deduction once their income surpasses set thresholds. The current House proposal would prevent SSTBs from using the SALT deduction workaround, a change that could have significant repercussions for those professionals, according to experts.
Conversely, pass-through businesses that do not fall under the SSTB classification may gain advantages from the proposed legislation. Depending on their income, these businesses could secure the more favorable 23% QBI deduction and retain the ability to utilize the unlimited SALT deduction through the PTE workaround.
The latest revisions to the SALT provisions have not gone unnoticed, generating responses from various community organizations. Some assert that the loophole associated with the SALT deduction could lead to excessive costs, prompting a call for transparency regarding its fiscal implications.
Organizations like the American Institute of Certified Public Accountants (AICPA) have pushed for the Senate to retain the SALT deduction workaround for SSTBs. They argue that if the House proposal is enacted as currently drafted, SSTBs will face unfair economic disadvantages purely based on their classification, making it difficult for them to benefit from the SALT deductions.
The unfolding developments surrounding the "One Big Beautiful Bill Act" highlight a critical intersection of tax policy and business implications. As Congress deliberates on these alterations, significant changes in tax benefits and eligibility criteria could affect various types of business owners, particularly in high-tax states. Keeping an eye on these legislative shifts will be crucial for understanding their broader implications.
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