The following article written by Randy Sprenger, EA, our Estate & Trust Manager applies to S Corps and Partnerships and their owners.

What is SALT?

No, it’s not just pepper’s companion. In the tax world, SALT stands for State And Local Tax, and is the acronym for the limitation placed on the amount of State and Local Taxes that can be deducted on Sch A. In 2017 the tax code was changed to place a $10,000 limit on the deduction of the following types of taxes: sales tax, state and local income taxes and real estate tax.

For many homeowners with high income and residing in a tax states this limit is very impactful. As a result, states on the east coast have been trying to create methods that their residents can still benefit from these expenses. Most have been rejected by the IRS, but one was approved late in 2020:

  • Entities taxed as partnerships and S-Corporations (including multi-member LLCs) can pay the state tax on its pass-through income for the partners/members/shareholders, deduct the payment on the Federal business return, pass-through a credit to be claimed on the individual’s personal return, and thus avoid the SALT limitation on the deduction.

Oregon adopted legislation along these lines that is effective for the tax years 2022 and 2023. This workaround is available to be claimed by Oregon Partnerships and S-Corporations. If you are a sole proprietor or a wage earner you cannot benefit from this provision.

Oregon has stated that further instructions will follow but for now to qualify all members of the entity must be subject to Oregon income taxes or be a pass-through entity that is owned by individuals that are subject to Oregon income taxes. All the owners must agree to the tax withholding. The withholding applies to the income of the entity that is Oregon source income which means that could be a reduced benefit if multiple states are involved. The withholding rate is 9% on the first $250,000 of eligible income and 9.9% for amounts above that limit. The withholding is reported as an Oregon fully refundable credit that is passed through to the individual, so if overpaid the individual will be refunded the excess money. The benefit of this election is that the entity claims a deduction for the withholding which will decrease the income that is passed through to the individual on the Federal return.

Although this sounds like a great program, and likely is, there are a few items to consider that can reduce the benefit. In a case where multiple states are involved, not all states have a workaround in place and the credit created may not be refundable. California for example allows the workaround from 2022 through 2025, but only up to the current year’s tax with the excess to be carried forward, but only for five years. If you can’t use it all in the first year, why would you expect to use it in the fourth — thus possibly creating a situation where the credit disappears. For partnerships with specifically allocated amounts like guaranteed payments, you can end up with some partners receiving a large benefit and others not much at all. And S-Corporations need to be careful as not managing the distributions could create a situation where there are uneven benefits between the shareholders that could risk the S-election.

We are currently reviewing the list of clients who we believe will benefit from this, and will be in contact in the coming weeks with details. If you have a specific question, please don’t hesitate to reach out.