Optional Entity-Level SALT Cap Workaround


In the near future, I intend to re-introduce legislation (SB 659 last Session) to support small businesses and pass-through businesses in the Commonwealth. This legislation would provide an elective pass-through entity tax filing option which would put federal tax dollars back in the pockets of Pennsylvania small business owners and help facilitate the federal deductibility of state income taxes. In doing so, Pennsylvania will better align with the vast majority of states which have already enacted similar legislation to provide their constituents with a path to increased federal tax deductions.

What is Pass-Through Entity Tax?

The pass-through entity tax (PTE) allows businesses formed as partnerships, LLC’s and S Corporations to elect to be taxed at the entity level for state income tax purposes. If the entity makes this election the partner or shareholder is usually allowed to:

(1) Claim a credit on their state individual income tax return for the amount of their distributive share of the pass-through entity tax paid by the LLC, partnership or S Corporation, and

(2) Allows the partner or shareholder to not have to report their distributive share of income on their personal state income tax return.

The federal Tax Cuts and Jobs Act (TCJA) imposed a $10,000 limitation on the federal tax deduction an individual taxpayer may claim for state and local taxes for tax years 2018-2025 (SALT Cap). This limitation presents challenges for taxpayers, and in particular, owners and shareholders of businesses structured as partnerships or S corporations. Income generated from the activities of these “pass through entities” is taxed at the owner level at Pennsylvania’s 3.07% Personal Income Tax (PIT) rate.

If such an entity-level tax election is made, the pass-through entity would pay tax at the same 3.07% PIT rate on income of its electing owners. The owners, in turn, would receive corresponding credits.

The net result would be payment of the same amount of tax, but with the benefit of federal deductibility as an expense of the electing business.

As of 2023, 36 of the 41 states imposing a personal income tax have passed legislation similar to this proposal.

This includes nearby states of Connecticut, Maryland, New Jersey, New York State (and City), Ohio, Virginia, and West Virginia. Aside from Pennsylvania, only the low population states of Delaware, Maine, Montana, Nebraska, and North Dakota have failed to enact or currently propose a SALT Cap workaround.

This legislation will provide potential federal tax benefits to a large number of pass-through entities, helping businesses of all sizes and income levels. Over 400,000 pass-through entities file tax returns in Pennsylvania. On the PIT returns reporting this income, nearly one-third (1/3) related to individual taxpayers reporting less than $250,000 of taxable income. These are the small business taxpayers who would have the ability to benefit from this legislation.

This legislation would place Pennsylvania on a level playing field with nearby states that have similar tax structures, which will provide federal income tax benefits and will put federal tax dollars back in the pockets of Pennsylvania small business owners. This will provide small business owners with increased funds for reinvestment and growth, which will in turn create more jobs for the people of Pennsylvania.

The need for this legislation is essential for Pennsylvania to remain competitive in the quest to both attract new businesses and to retain current businesses as well.

Senators who co-sponsored this legislation last session were:
AUMENT, CULVER, ROTHMAN and A. WILLIAMS

I respectfully ask for your consideration to join me as a co-sponsor of this legislation and show our support of small business and pass-through business owners as we look to strengthen our state economy.

Statutes/Laws affected:
Printer's No. 0343: P.L.6, No.2
Printer's No. 0508: P.L.6, No.2