When the dust settled on last year’s tax overhaul, pass-through businesses were confronted with new rules for deducting State and local taxes – if they paid the taxes at the entity level, they could deduct them.  If the taxes were paid at the owner level, they could not.

So, S-Corp asked, “Why not give Main Street businesses the option to pay state and local income taxes at the entity level?”  That would preserve their ability to deduct those taxes and make the adopting state that much more attractive to Main Street employers.  Moreover, the tax overhaul allows C corporations to deduct …

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Yesterday’s Finance Committee hearing on the tax bill was interesting, if only to remind viewers that it’s way too early to pass final judgement on the tax overhaul.  Not that several Committee members didn’t try.

Exhibit A was a new Joint Committee on Taxation report with some selective analysis of the tax plan.  Members repeatedly brought up Table 3 and the fact that so much of the “tax benefit” of the pass-through deduction will go to taxpayers making more than $1 million.

The goal of the pass-through deduction was to maintain tax parity …

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(For clarity purposes, this write-up focuses on S corporations.  The arguments and policy conclusions largely apply to partnerships as well.)

Like C corporations, S corporations are subject to state and local income taxes imposed on qualified business income.  Unlike a C corporation where the state and local income tax is incurred and paid at the entity level, however, an S corporation remits its share of state and local income taxes in three different ways, depending on the state:

1. Entity Level State & Local Tax Income Liability
2. Composite/Withholding State & Local Income Tax Liability
3. Individual State & Local Income Tax Liability …
   
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Treasury has its hands full with the new tax overhaul.  As technical comments from the US Chamber, AICPA and S-Corp make clear, the list of necessary guidance for the business community is long and growing.

Common to all three lists is the issue of aggregation.  This technical sounding challenge looms large for businesses trying to calculate their pass-through deduction for 2018.  For many of them, the question of whether to aggregate or not could mean the difference between getting the full 20-percent deduction or not.

To emphasize the importance of this issue, more than 40 trade groups, including the …

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2018 will be a pivotal year for Main Street businesses and the trade groups that represent them.  The 20-percent pass-through deduction is helpful to those businesses that qualify, but it’s availability is limited by income, industry, location, and other “guardrails” so complicated even tax experts are scratching their heads.

Meanwhile, the new federal law precludes most pass-through businesses from deducting their state and local income taxes.  And finally, the 20-percent deduction is scheduled to sunset in a few years, threatening many pass-through businesses with a tax hike in future years.

To help provide policymakers with a better sense of how the Main …

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