We can’t predict victory for the University of Arkansas’s basketball team in March Madness (Seeded 3rd in the South) but the state’s pass-through business owners are already winners, as the state officially became the ninth state to adopt our SALT Parity reforms yesterday. Governor Asa Hutchinson signed House Bill 1209 into law just last night.
The new law allows owners of pass-through businesses – including S corporations and partnerships – to elect to pay their state taxes at the entity level, rather than having the business’s income flow through to the individual owners.
By way of background, deductions on state and local taxes (SALT) paid by pass-through business owners are currently capped at $10,000. Conversely, C corporations are allowed to fully deduct these same expenses. In states that tax pass-through firms at the owner level, the disparate treatment puts their firms at a significant disadvantage compared to C corporations. As such, restoring the federal SALT deduction in its entirety for pass-through entities has been a key priority for S-CORP and the Main Street Employers coalition ever since the cap was implemented back in 2017.
We’ve also worked to educate lawmakers on the fact that states can restore parity by allowing pass-throughs an election to pay their SALT at the entity level. Our general premise is that shifting the incidence of the tax makes those payments deductible at the federal level, while maintaining revenue neutrality for the state. The approach was blessed by the Treasury Department just a few months ago, paving the way for states like Arkansas to reduce taxes on their businesses during these trying times.
Per the bill’s accompanying fiscal note, published by the Department of Finance and Administration, H.B. 1209 would provide tax relief to nearly 18,000 Arkansas S corporations and partnerships starting next year. Recognizing the significant benefit that SALT Parity would provide to the state’s individually- and family-owned businesses, Arkansas lawmakers overwhelmingly supported H.B. 1209, and voted unanimously to approve H.B. 1209: 98-0 in the House, and 35-0 in the Senate.
We expect many other states to adopt our SALT Parity reform in the coming weeks. It’s an easy way to help a state’s Main Street business community during a difficult time, all at no cost to the state. Now if the Razorbacks could just make a run to the Final Four, Arkansas would be in hog heaven.