In Defense of SALT Parity

May 29, 2025|

House passage of the big reconciliation bill is a welcome development for the millions of Main Street job creators otherwise facing a massive tax hike next year. S-Corp enthusiastically supports the measure, but one question remains — why does a bill designed to prevent tax hikes on small and family-owned businesses raise taxes on many of those businesses instead?

To recap – the House-passed bill would limit SALT deductions for millions of pass-through business owners of so-called Specified Service Trade or Businesses (SSTBs), imposing an $80 billion tax hike on these businesses even as the C corporation down the street continues to deduct all its SALT payments. Compared to what those businesses will pay this year (or pre-TCJA) that’s a tax hike beginning in 2025.

S-Corp opposed the SSTB designation when it was used to limit the Section 199A deduction back in 2017, and we really hate it now that it’s being used to limit SALT deductions as well.

Turns out we’re not alone. The Tax Foundation is out with a new analysis of the provision. Key take-aways include:

Economic Impact of Eliminating PTET Workarounds: The analysis estimates that disallowing SALT deduction cap workarounds for Specified Service Trades or Businesses (SSTBs) would reduce GDP by 0.2% and the capital stock by 0.3%. This suggests that the removal of PTET mechanisms could have a negative effect on the broader economy.

Concerns About Tax Neutrality: The Tax Foundation also notes that disallowing PTETs only for some pass-through entities diverges from the principle of tax neutrality by creating substantially differential tax treatment for various types of pass-through entities. This could lead to inefficiencies and distortions in business decision-making

Implications for High-Tax States: In high-tax states like New York, the elimination of PTET workarounds could significantly increase the federal tax burden on certain businesses. For instance, the removal of PTETs could result in New York businesses paying an additional $5 to $6 billion in federal taxes, with some New York City firms facing a 50% tax hike due to the loss of deductions, such as the city’s 4% unincorporated business tax.

Conclusion: Under the proposed changes, while C corporations and some pass-through businesses would still be able to treat taxes as a deductible business cost, many other pass-through businesses would not — non-neutral treatment that benefits some industries and business formations over others, and which comes at an economic cost. Our analysis highlights the implications of removing PTET mechanisms, especially for pass-through entities operating in high-tax jurisdictions.

Next up is the AICPA letter to congressional tax-writers raising a series of concerns about the House-passed bill, including strong opposition to the SSTB SALT carve-out:

The AICPA urges Congress to retain the entity level deductibility of state and local taxes for all pass-through entities. The One, Big, Beautiful Bill Act as proposed unfairly targets specified service trades or businesses (SSTBs) (as defined under section 199A(d)(3)) by preventing SSTBs from deducting state and local income taxes and, therefore, further needlessly widening the parity gap among (i) SSTBs and (ii) non-SSTBs and C corporations.

This proposed bill would leave SSTBs in an even worse position than pre-TCJA by prohibiting SSTBs from deducting local taxes, which had been a permissible deduction before the enactment of TCJA. Aside from simply preventing SSTBs from claiming any deduction for state and local taxes, this bill would introduce significant complexity and uncertainty in the proposed “qualifying entity” test, the “state and local tax allocation mismatch” rules of proposed section 6659, and the “substitute payment” limitation. The changes to section 164 and section 275 should be clear, avoid double-negatives, and put more emphasis on the treatment of common taxes of all businesses, such as income, gross receipts, sales and use, property, and excise taxes.

Finally, a national survey conducted by the Winston Group shows voters are highly skeptical of the House approach and support tax parity over efforts to single out pass-throughs with new tax burdens.

Voters were asked about the House bill’s proposal to limit the ability of pass-through businesses to fully deduct their state and local tax (SALT) expenses:

Overall, 68 percent favor the idea of allowing small and family-owned businesses to deduct the cost of state, local and property taxes as a business expense from their federal taxes (68-13 favor-oppose). Strong majorities of conservative Republicans (70-11), Republicans overall (71-11) and independents (63-16) are also in favor.

One of the most striking findings: 82 percent of voters believe that small and family-owned businesses should receive the same treatment as corporations when it comes to deducting state and local taxes.

Voters also recognize that eliminating this deduction would amount to a tax increase on the very businesses that employ most American workers. Nearly two-thirds of respondents said ending the deduction would “put more [businesses] out of business.” And 71 percent said small businesses should be using that tax revenue for wages and benefits, not handing it over to Washington.

The goal of the reconciliation bill is to make permanent the tax benefits of the 2017 Tax Cuts and Jobs Act for families and Main Street businesses. These businesses employ a large majority of American workers. In recent years they’ve weathered the pandemic, supply-chain disruptions, inflation, labor shortages, and interest rate hikes. Now is the time to support them, not single them out. Rolling back SALT Parity for Main Street businesses is bad policy, bed economics, and bad politics.

Pro Main Street Tax Bill Passes House

May 22, 2025|

The House adopted the One Big Beautiful Bill Act (yes, that is the official title) by a vote of 215-214 this morning. This is good news for Main Street businesses, who have a lot at stake in this effort – failure by Congress to act would result in one of the larger tax hikes in history, so success is essential here.

Pro-Main Street provisions in the bill include making permanent the lower rates on pass-through income, making permanent and expanding the 199A pass-through deduction, and making permanent and expanding the estate tax exemptions that benefit family businesses. The bill would reduce taxes on Main Street businesses when they earn profits and when they are passed on from one generation to the next.

Next steps include all the House members and staff going home to sleep, followed by a week of Memorial Day recess, followed by Senate consideration of the bill. Exactly when the Senate takes up the bill is unclear, but the pressure is to move quickly to give both chambers time to resolve any differences and adopt the final product before the 4th of July.  An aggressive timeline, but today’s action makes that possible.

Regarding any Senate changes, expect to see them.  As Tax Notes reported earlier this week:

Republican senators are sending an early warning to their House counterparts that they plan to take a red pen to the House reconciliation bill — including its $3.8 trillion tax title — when it arrives in the Senate….

“Anybody that thinks that we’re just going to rubber-stamp it and pass it out needs to understand there’s more work to do,” Senate Finance Committee member Thom Tillis, R-N.C., said. “The Senate will put its work on it once we get it over here.”

When asked if there was anything in the House tax bill he’d like to change, Sen. John Kennedy, R-La., responded, “A lot.”

S-Corp will be meeting with Republican Senate offices starting today to press for specific improvements to the House bill, including:

  • Improve the SALT PTET Provisions: S-Corp has always opposed the Specified Services Trade or Business (SSTB) exclusion to the 199A deduction (as opposed to the other 199A guardrails which we supported) so extending this policy to our SALT Parity bills is an easy “No”. Why are some pass-through jobs more equal than others? We’d like to kill the whole thing. Failing that, making the SSTB provision comprehensible will be a priority.
  • Expand 199A to Include Foreign Income: Unlike the 21-percent corporate tax rate, pass-through income that qualifies for the 199A deduction is limited. For example, Qualified Business Income (QBI) does not include foreign-sourced income. There’s no apparent policy reason for this exclusion and it means pass-throughs pay rates up to 37 percent on their foreign income. S-Corp has advocated for including foreign income in QBI since the beginning.
  • Zero-out 199A Deficit Accounts: A little understood limitation to the 199A deduction are its so-called deficit accounts. These accounting devices require businesses to keep track of any losses within the QBI category and then run through those accumulated losses before they can benefit from the 199A deduction. Following COVID, the percentage of S corporations in a loss position was about 30 percent, so this is a big deal that will prevent millions of businesses from benefitting from the extended 199A deduction.
  • Strike the Excess Loss Provision: We have written about this provision many times (here, here, here).  It is a poorly thought out (and poorly scored) provision that treats pass-through owners worse than their C corporation competition. Rather than making this policy permanent, the Senate should repeal it outright.

The House adoption of the Big Beautiful Bill is a huge win for Main Street, but there remains work to be done. S-Corp looks forward to quick consideration of the bill in the Senate, and we plan to work with our Main Street friends to produce a bill that benefits all S corporations and other pass-through businesses.

Voters Support Main Street Tax Cuts

May 19, 2025|

With the House preparing to consider the big reconciliation bill this week, our friends at the Winston Group have delivered some good news – turns out, the American voters support keeping taxes on Main Street businesses low and they think excess spending, not taxes, is the problem when it comes to the deficit.

According to the Winston Group:

From the electorate’s perspective, government spending is by far the bigger problem than not enough revenue coming from taxes (70-21). Independent voters also see spending as the larger problem at 68-20. Inflation is still a major concern, with almost half the electorate (49%) believing that inflation is getting worse, rather than better (30%) or not changing (18%).

Given this economic outlook, voters are opposed to a tax increase in this environment: With the country still dealing with inflation, now is not the time to raise taxes (62-25 believe-do not believe). This belief is even higher among conservative Republicans (71-17) and Republicans (68-20). Independents also believe this 58-27.

Meanwhile, efforts to raise taxes are seen as inflationary:

Additionally, tax increases on businesses are seen as leading to higher costs for consumers. 70% of the country believes that if companies have to pay more in taxes, those costs will be passed on to consumers in higher prices (70-16 believe-do not believe). This belief is consistent among conservative Republicans 73-17, Republicans 73-16, and independents 70-14. Even Democrats believe this (68-19).

Finally, what about these surveys showing voters support taxing the rich?  Not so much, turns out.  As in the past, Americans are very reasonable about the most anybody should pay to the Federal government:

While the preferred rate on the wealthy of 35 percent is higher than it has been in the past (here, here), it’s still well below the 40 percent or so rate we tax top earners at right now.  Far from supporting higher rates, Americans support cutting them instead.

One of the comments in the Twitter thread above asked why raising individual rates would harm Main Street businesses. The answer is because nearly all businesses pay tax at the individual rates.  New numbers from our friends at the Economic Policy Innovation Center show that proposals to increase rates on incomes exceeding $1 million would hit 825,000 business owners and 33 percent of all the affected income.

Main street businesses have a lot at stake in the pending reconciliation bill.  Good thing for them keeping taxes low on employers is good policy and good politics. We look forward to seeing the House adopt the reconciliation package soon!

Tax Nerds Gone Wild

May 15, 2025|

Main Street supports the tax bill adopted by the Ways and Means Committee this week, but not all the bill’s provisions are worth keeping. The House provision limiting SALT deductions on pass-throughs is a good example of why the “experts” need close supervision.  These provisions are hopelessly complicated and will hurt members of the very Main Street business community this bill is supposed to help.

First, some history. The TCJA imposed a new $10,000 cap on individual SALT deductions. It did not cap the SALT deductions of business entities, so corporate SALT (C-SALT) and any SALT paid by pass-through entities directly (B-SALT) continued to be deductible as a business expense.

This approach put pass-throughs at a disadvantage as most B-SALT is paid by the owners, not the entity. This was a big deal – losing the SALT deduction was equal to a 2-5 percentage point tax hike and effectively reduced the 199A benefit by about a third. The Main Street Employer coalition largely restored the lost deduction by encouraging 36 states to adopt our SALT Parity bills. (You can read the full history of our SALT Parity efforts here.)

The tax bill before the House would roll back about 40 percent of those deductions. At a high level, the changes preclude B-SALT deductions on business income that is designated as Specified Services Trade or Business (SSTB) income under Section 199A. How this works is remarkably complicated. Here is our best take:

  • Pass-through entities need to test if their SSTB income exceeds 25 percent of their aggregated business income. If it does, they are precluded from deducting any of their B-SALT as a business expense. This test requires business owners to engage in a complicated aggregation of all their income from related business entities. (More on that below.)
  • For entities that pass the test, they may deduct their SALT as a business expense, but only on non-SSTB income. For example, if a business has 20 percent SSTB income and 80 percent non-SSTB income, they get the B-SALT deduction on the 80 percent only.
  • Finally, any B-SALT paid on SSTB income must be newly reported to the business owners and then subject to the individual SALT cap.

It’s a “belt-and-suspenders” approach, but is all this really necessary? Clearly not. Here are some concerns:

Complexity 1: S-Corp strongly disagrees that B-SALT needs to be restricted. If Congress is determined to proceed, however, why do it in such a complex manner? Why not just exclude SSTB income from B-SALT deductions?  Why drag millions of businesses through a super complex, yet-to-be drafted 75/25 aggregation test when the provision already excludes SSTB income from the B-SALT deduction anyway?

Complexity 2: The bill would create two separate and conflicting rules for determining qualified income – the existing rule for determining qualified income under Section 199A and a new, much more punitive aggregation rule for determining B-SALT deductions. Since the bill already relies on Section 199A for the SSTB rules, why not use the 199A aggregation rules too?

It is an Election: On that note, why bother with the new K-1 reporting regime?  If SSTB income is precluded from B-SALT deductions at the entity level, why force pass-throughs also to report their SSTB deductions separately to their owners?  They are highly unlikely to get any benefit. We designed the PTET deduction as an election in order to side-step all this complexity. If you don’t benefit from a PTET tax, don’t make the election. No reporting required.

Parity 1: The argument against B-SALT deductions is that it disadvantages wage earners who are subject to the individual cap, but wage earners enjoy benefits not available to business owners. They get employer-paid FICA and HI taxes and tax-exempt benefits like health insurance coverage. It is not at all obvious who gets the best deal, an issue we addressed previously here.

Parity 2: As noted above, the reason our SALT Parity laws work is because Congress elected not to cap C-SALT deductions. In this bill, Congress again elected not to cap C-SALT, yet they are targeting B-SALT.  How does that make sense? The benefit is the same. A C corporation deducts its C-SALT from its income leaving it more resources to invest and create jobs, while any subsequent payments to shareholders will reflect the added value of those deductions.

Parity 3: By tying the B-SALT changes to Section 199A, businesses operating as an SSTB are in for a double whammy – their income doesn’t get the 199A deduction and under the House bill it will be excluded from SALT deductions too. Senators and Representatives should be prepared to hear from the excluded industries. When a constituent business owner complains about tax hikes under this bill, this is what they are talking about.

The House bill is important to Main Street. Absent action, pass-through businesses face a historically large tax hike next year. That said, the bill adds to the tax disparity between corporations and pass-throughs — corporations get substantial tax relief with almost no offsetting provisions, whereas pass-throughs are subject to a mixed bag of benefits and costs.

Several of those costs are hopelessly complicated provisions that will excite tax nerds and enrich accountants, all at the expense of Main Street businesses.  The B-SALT deduction limitation is foremost among these, and it needs to be scrapped.

Main Street Backs Tax Package

May 13, 2025|

More than ninety trade associations came out in support of a broad tax package before the House Ways & Means Committee later today. The legislation builds on the TCJA by making permanent and expanding several key provisions important to America’s pass-through community.

As the letter reads:

This legislation would provide certainty to the more than 95 percent of all American businesses structured as S corporations, partnerships, and sole proprietorships. These pass-through businesses employ 62 percent of the private sector workforce and form the economic backbone of virtually every community nationwide.

Provisions key to the Main Street community include increasing the Section 199A deduction to 23 percent while making it permanent. This provision recognizes the importance of parity in the tax code by bringing down marginal tax rates for the 26 million businesses that rely on the 199A deduction. Coupled with a permanent 37 percent top rate, the legislation would lower the top rate paid by pass-throughs and bring it closer to parity with the 21-percent corporate rate.  

Another key feature is the commitment to reducing the bite of the estate tax:

Main Street also strongly supports provisions to enhance and make permanent the estate tax exemption. Reducing the bite of the estate tax while eliminating the uncertainty surrounding its application will help preserve countless Main Street businesses, sustain jobs, and help ensure these enterprises can remain family-owned for generations to come.

That said, the House tax bill is not perfect.  It includes numerous needlessly complicated provisions, several of which are targeted directly at small and closely-held businesses:

Certain provisions should be improved. The limitation on SALT deductions for certain pass-through entities is needlessly broad and complex, while tightening and extending the cap on excess losses would make worse a policy that should never have been enacted in the first place. 

S-Corp and its allies will continue to work with the House and Senate to address these concerns.

On the whole, this bill represents a significant step forward, particularly in comparison to the existential threat facing the Main Street business community if Congress fails to act. There remain major hurdles to overcome before it becomes law, but there’s plenty of reason for pass-throughs to be optimistic about this bill. It is an excellent starting point and Main Street supports it.

<<Click Here to Download the Full Letter>>

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