Tax & Assurance Guidance

SALT Relief for Partners and S Corps

Posted on February 23, 2022 by

Miroslav Georgiev

Miroslav Georgiev

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With small businesses supporting nearly 47% of U.S. employees, states have been advocating for often-neglected business segments lacking powerful lobbyists, such as pass-through entity businesses (PTEs), operating partnerships and S corporations. These entities have been harshly impacted by the Tax Cuts and Job Act ‘s (TCJA) state and local taxes deduction limit. Recent legislative activity is finally providing relief for many of these businesses. 

TCJA SALT Impact on PTEs

To recap, the TCJA eliminated or restricted many business deductions when signed into law in 2019; including restricting the deduction for sales and local taxes (SALT), which had a particularly harsh effect on PTEs.  

  • The $10,000 SALT deduction limitation, known as the SALT cap, was applied uniformly to all business owners 
  • PTE business owners who pay SALT taxes reported on their Schedule K-1 information returns are limited to a $10,000 deduction, and may not be eligible to deduct the full amount of SALT taxes paid 

State Relief with PTE Tax Regimes

CPAs and advocates country-wide have rallied to combat the costly impacts to partners and S corporation shareholders. To date, 23 states have passed workaround regulations to lift the financial burden on business owners. 

Often referred to as PTE tax regimes, many states have passed their own legislation permitting businesses to make an election to deduct paid state and local taxes. This passes through the SALT deductions to the owners as an entity level deduction, rather than subjecting it to the limitations at the individual level. 

Regulatory Guidance

The complex TCJA has required many clarifications by the Internal Revenue Service (IRS), which includes more clarity on SALT deductions. IRS Code 164(a) describes the ability to deduct paid or accrued SALT taxes and its effect during the purchase or sale of a business (referenced as acquisition and disposition). 

In November 2020, the IRS published Notice 2020-75 offering additional guidance and the ability for states to offer an election. The language also consistently references SALT paid during the year, rather than accrued. It’s important to perform careful analysis, especially as it pertains to accrued SALT liability. Taxes paid in U.S. territories should also be considered when applying the SALT cap or making decisions regarding SALT treatment. 

State Variations

Among the 23 states that have currently passed PTE SALT legislation, there is a great deal of variety among their laws, election dates, and due and effective dates.  

Michigan, for example, passed state and local tax (SALT) reform that allows a retroactive election to Jan 1, 2021, without penalties or interest on ‘missed’ quarterly payments. Annual returns for flow-through entities for calendar year filers have until March 31, 2022, to make their election. 


  • Some states allow an annual election to be made between whether SALT deductions are taken at the entity level and others state that the election is irrevocable 
  • Some permit retroactive elections, while others are forward-looking 
  • The dates regarding elections may be affected by whether you operate on a calendar year basis or utilize a different fiscal year 
  • Many state that the period covered is through December 31,2026, the date the TCJA SALT cap expires, and others are silent on the end date 
  • State alternative minimum taxes are considered in some legislation 
  • Carryforwards may be allowed by some states 
  • Some states have lifted the requirement of requiring personal income tax returns for K-1 filers with no residency in the state, while others still mandate their filing 

Analysis and Decisions

It’s great to see states working on behalf of small business owners to encourage economic growth and ongoing employment. Many factors must be evaluated to determine the right course of action for state and local taxes for each PTE business. Conduct careful analysis or seek guidance to ensure the right choice is made and that deadlines aren’t missed. Contact us today for more information. 

Miroslav Georgiev


Miroslav is a technical & responsive member of the tax team, providing leadership to the firm’s state and local government tax practice.

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