SALT Workarounds Carry Consequences for Tax Affected Earnings

State and local tax workarounds such as pass-through entity income tax options have received their share of news coverage. But their impact on business valuation is often overlooked, creating traps such as complications in “tax affecting” earnings, says Brady Ware Arpeggio’s Bruce C. Wood.

Once again, necessity is the mother of invention. It is no secret that the $10,000 SALT itemized deduction limit imposed by the 2017 Tax Cuts and Jobs Act spurred lots of unhappy chatter, particularly for people in states with the highest income tax rates. Topping the charts are California at 13% and Hawaii at 11%. You can hear residents complaining, “Like it wasn’t expensive enough to live there already—now I can’t deduct my state taxes!”

In response to such complaints, many states have implemented SALT “workarounds” by enacting a pass-through entity income tax option, which allows PTEs to pay (and deduct) state income taxes at the entity level, effectively bypassing (working around) the federal individual SALT deduction’s $10,000 limit.