South Carolina Joins Other States and Adopts Federal State and Local Tax Deduction Cap Workaround

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[author: Erik P. Doerring]

The State of South Carolina has now adopted legislation allowing “pass through” entities to elect each year to be taxed at the entity level on their active trade or business income instead of having their owners taxed at the individual level on this income. This includes partnerships, S-corporations and LLCs taxed as partnerships or S-corporations. This election can be filed for tax years beginning after December 31, 2020.

South Carolina has now joined a growing number of states that have enacted federal state and local tax “workaround” legislation, and which shifts state and local income tax liability from the individual owners to the business entity in order to avoid subjecting this income to the federal $10,000 state and local tax (“SALT”) deduction limitation that otherwise would apply at the individual owner level. Some states, like South Carolina, permit an election for the SALT deduction cap work-around, while other states make this form of taxation mandatory.

The Treasury Department and the IRS have each announced that legislative work-arounds such as that now adopted by South Carolina can be used to circumvent the federal SALT deduction limit.

However, Congress is presently considering the elimination of the federal SALT deduction limit, and which could be adopted as early as this year. If Congress does act to eliminate this federal deduction limitation, state legislative work-arounds, like that adopted by South Carolina, may be unneeded. In those states that allow an election for a legislative work-around, pass-through businesses and their owners may wish to wait and see if Congress eliminates the SALT deduction limit before making an election to use an applicable SALT work-around.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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