Trump’s Tax Bill: How will taxpayers and businesses be impacted?
As the House Republicans pass President Donald Trump’s sweeping tax bill, businesses may face drastic changes if approved by the Senate.
The House GOP’s ‘One Big Beautiful Bill Act’ would raise the federal deduction limit for state and local taxes, also known as ‘SALT.’ If enacted as proposed, the limit would jump from $10,000 to $40,000.
This would no longer apply after businesses earn $500,000 or more.
Furthermore, the bill would increase a tax break from pass-through businesses to 23 percent. This qualified business income deduction or ‘QBI’ applies to partnerships, sole proprietors, S-corporations, as well as some trusts and estates.
This would, however, end the state-level SALT cap workaround, popular among certain pass through business owners.
What is SALT deduction?
The state and local tax deduction that allows taxpayers to deduct taxes paid to the government from their federal income tax returns.
As of 2017, the Tax Cuts and Jobs Act, or TCJA imposed a $10,000 limit for filers that itemize tax breaks.
This limit is troubling for states like New Jersey and New York where residents can only deduct up to $10,000 for SALT, including property, income, and sales tax which are higher than the national average in these areas.
Yet, many businesses utilize the pass-through-entity or PTE tax to bypass this limit. Although each state varies in rules, this strategy primarily involves paying SALT through a pass-through business to circumvent the mandated cap. The $10,000 cap is set to expire after 2025.
What would change in the SALT workaround?
Specified service trade or business professionals (SSTB) including lawyers, financial advisors and doctors are currently unable to claim the qualified business income deduction once their income exceeds specific limits.
If enacted, SSTBs would be blocked from using the SALT deduction workaround.
On the other hand, non SSTBs could qualify for the bigger 23 percent QBI deduction depending on income, and also still claim the unlimited SALT deduction by way of the PTE tax.