Individuals should view SALT cap workaround with caution

While this is welcome news from a federal income tax standpoint, it could pose unintended consequences for individuals subject to state income tax as nonresidents. In most states, individuals are subject to tax on all their income, regardless of whether it is attributable to their state of residence. In addition, in states where income is earned by a pass-through entity, income tax will be imposed on the owner based on his or her share of the income attributed to that state. To mitigate the impact of the same income being taxed twice, the state of residence will provide a tax credit. Because the credit is predicated on the individual being subject to tax in the nonresident state, it might not be allowed for taxes imposed on the pass-through entity itself. For example, most states do not allow a credit for the Tennessee income-based tax imposed on most pass-through entities because the owners are not subject to tax. It remains unclear whether a state similarly would disallow a resident credit for an elective pass-through entity tax.

The notice indicates that the guidance applies to tax payments made in the partnership or S corporation’s taxable year ending after Dec. 31, 2017, and made before Nov. 9, 2020, provided that the payment is made to satisfy the liability for income tax imposed on the partnership or S corporation under a law enacted prior to Nov. 9, 2020.