The good news on SALT Parity keeps rolling in. Just days after California’s Governor signaled his support, New York Governor Andrew Cuomo followed suit and included our pass-through SALT Parity language in his 2022 fiscal year budget proposal.

Since 2018, deductions on state and local taxes (SALT) paid by pass-through business owners have been capped at $10,000. C corporations, on the other hand, are allowed to fully deduct these same expenses. In those states that tax pass-through firms at the owner level, the disparate treatment puts them at a significant disadvantage compared to C corporations.

As S-Corp readers know, beginning in 2018 S-Corp and the Main Street Employers coalition have advocated for the restoration of the federal SALT deduction to pass-through businesses. States can restore parity by allowing pass-throughs an election to pay their SALT at the entity level. Shifting the incidence of the tax makes those payments deductible at the federal level, while maintaining revenue neutrality for the state. It is a win-win that was recently blessed by the Treasury Department, paving the way for states like New York to reduce taxes on their businesses at a difficult time.

New York initially raised this issue back in 2018. Its Department of Tax and Finance released a draft PTE tax plan that summer and S-Corp submitted comments recommending that the plan be constructed as an election, to protect some businesses from an unintended tax hike, and that S corporations be made eligible for the election alongside New York partnerships.

The briefing book accompanying Governor Cuomo’s budget proposal makes clear the state adopted our recommendations in their latest proposal. While several details need to be worked out, the basic structure of the proposal is promising:

“The Budget includes a new voluntary Pass-Through Entity Tax designed to mitigate the impact of the cap on state and local tax (SALT) deductions enacted in the 2017 Tax Cuts and Jobs Act. Pass-through entities can deduct this tax at the Federal level, thereby allowing partners of partnerships and shareholders of S corporations to receive the benefit of a full deduction for SALT paid before income is passed-through to them. A credit will be allowed against regular State income tax to offset the new Entity tax. This proposal aligns with similar efforts in Connecticut and enables individuals affected by the SALT cap to use IRS-allowed business deductibility to mitigate its impacts.”

In other SALT news, Treasury Secretary nominee Janet Yellen appeared before the Senate Finance Committee on Tuesday and was asked about the Biden Administration’s plans regarding the SALT deduction cap. She refused to commit to pursuing repeal and suggested instead that the incoming Biden administration would wait for a stronger economy before pushing for major changes to the tax code. Yellen stated:

“The SALT deduction was eliminated only a few years ago, and before making a decision about what should be done looking forward, I think it’s critical to study and evaluate what the impact has been on state and local governments on their ability to provide critical services, and I promise to work with those at Treasury and throughout the administration in evaluating what impact that has had on states and local governments…on households, on small businesses.”

With the White House and Congress under Democratic party control, many have speculated they would act quickly to repeal the SALT cap altogether. Yellen’s testimony suggests otherwise.

So, New York joins more than a dozen states actively considering our SALT Parity reform this year. With the uncertain prospects of federal action, the recent IRS blessing clarifying their position, and the effects of COVID continuing to negatively affect millions of businesses, this is the perfect time for states to take up this reform and help their Main Street businesses.