On May 17, 2021, South Carolina governor Henry McMaster signed legislation allowing pass through entities (partnerships, S-corporations and LLCs taxed as partnerships or S-corporations) to annually elect to be taxed at the entity level on their active trade or business income instead of having their owners taxed at the individual level on this income. This election is available for tax years beginning after 12/31/2020.
With this legislation, South Carolina joins a growing number of states that have enacted this type of “SALT workaround” election, which shifts the tax liability from the individual owners to the business entity in order to avoid subjecting this income to the federal $10,000 state and local tax (“SALT”) deduction limitation that otherwise would apply at the individual owner level. The list of states with this type of SALT workaround now includes: Alabama, Arkansas, Connecticut, Georgia, Idaho, Louisiana, Maryland, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin. Connecticut’s entity-level tax is mandatory, while the other twelve states’ are elective. Several other states’ legislatures (including California) currently are considering similar legislation.
The U.S. Department of Treasury and the Internal Revenue Service confirmed last year that these types of entity-level taxes would be a permissible method to avoid the federal SALT deduction cap that applies at the individual taxpayer level.
Proceed with CAUTION: Making this type of election can significantly reduce the individual business owners’ federal tax liability. However, there are potential issues at the state level that must be considered before making such an election. If the pass through entity files income tax returns in multiple states, or has owners who reside in other states, the election could have unintended negative results, including potential double-taxation of income from the flow through entity.
Webster Rogers’ SALT Team can help you and your business evaluate the pros and cons of making a SALT-workaround election in any of these states. Our SALT professionals have decades of state and local tax experience and a passion for finding the best results for you and your business. Reach out to your WR Partner, your relationship manager, or the WR SALT Team if you would like to discuss a potential SALT-workaround election, or any other State and Local Tax issues impacting your business.