SALT CAP WORKAROUND

As you know, the Tax Cuts and Jobs Act of 2017 limited the deduction for State and Local Taxes (SALT) on personal income tax returns to $10,000.  This includes real estate taxes as well as state income taxes.  For taxpayers with a SALT total greater than $10,000, this can result in the loss of some deduction if the total itemized deductions would have been greater than the standard deduction.

Illinois enacted the SALT Cap Workaround for owners of S corporations and partnerships.  Beginning with tax years ending on or after December 31, 2021, S corporations and partnerships can elect to pay income tax on its Illinois net income and the shareholders and partners can circumvent the cap on SALT itemized deductions on their federal income tax return.  This only applies to the distributive share of income, not to wages or guaranteed payments.

The entities can elect to pay 4.95% taxes to Illinois at the corporation or partnership level, and the shareholders and partners will claim a credit for these taxes on their personal returns.  Since the tax paid at the entity level is a deduction and reduces net income, this circumvents the itemized deduction limitation.

This election must be made every year, and is irrevocable.  Estimated taxes must be paid by the entity during the year in 4 installments.  However, for this first year, entities are allowed to make just one entity-level tax payment before December 31. 

If you wish to take advantage of this work around for 2021 be aware that you may end up paying an excess in taxes to Illinois this year which will be refunded.  This is because you have been taking withholding and/or estimated personal payments, and then you will pay some of the tax again with the entity estimate.  The excess will be refunded on your 2021 Illinois personal income tax return. 

Please contact us with any questions, or if you are interested in taking advantage of this for 2021 or going forward.