The Kansas legislature recently passed legislation referred to as the SALT parity act providing a workaround to a provision in the federal 2017 Tax Cuts and Jobs Act that caps the individual itemized deduction for state and local taxes (SALT) at $10,000. The law goes into effect July 1, 2022 and is effective for tax years beginning after December 31, 2021. More than 20 states have enacted similar workaround legislation.
The workaround
The new law allows pass-through entities (PTEs), such as S corporations, partnerships, and limited liability companies to make an election to pay the state income tax due on the company's income rather than the individual partners or shareholders paying the tax. The individual gets the benefit of the additional deduction at the federal level by way of a reduction to their share of reportable income from the PTE. At the state level the partners or shareholders get a credit on their Kansas tax returns for the state income tax paid by the PTE on their behalf.
Planning considerations
It is important for PTEs to review the income tax circumstances of the company and that of the partners/shareholders before making the election. Consideration should be given to the source and amount of income or loss of the PTE, and if it is filing in multiple states whether a PTE election may be available in one or more other states. PTEs should also consider the residency status of the partners/shareholders and whether the individuals should adjust the amount of their state estimated tax payments to take into account the tax that may be paid by the PTE. In some situations, it may be necessary to act prior to the end of the year to enhance the amount and timing of the benefit from making the PTE election.
In summary
Kansas is helping PTE partners/shareholders reduce their federal income tax liability. Eligible companies need to start planning well before the end of the year to determine the best course of action for their situation. Failure to properly plan can result in the deferral of the benefit from making the election.
To learn more or if you have any questions about your situation, contact Shawn Sullivan using the information below.
Executive Vice President
Tax Services
Shawn leads the firm’s tax group and serves on AGH’s board of directors. In addition to enhancing business performance to minimize tax consequences, he has extensive experience in mergers and acquisitions, international tax and business structuring. Shawn has public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, automotive, wholesale distribution, real estate development and construction industries.
A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.