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05/30/2024 06:57 PM
Pennsylvania State Senate
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=S&SPick=20230&cosponId=40033
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Senate of Pennsylvania
Session of 2023 - 2024 Regular Session

MEMORANDUM

Posted: March 2, 2023 01:12 PM
From: Senator Ryan P. Aument
To: All Senate members
Subject: Optional Entity-Level SALT Cap Workaround
 
In the near future I intend to introduce a bill, similar to Senate Bill 1320 of the 2021-22 legislative session, to support small businesses and pass-through businesses in the Commonwealth by providing an elective pass-through entity tax filing option which would facilitate the federal deductibility of state income taxes.  In doing so, Pennsylvania will better align with the vast majority of states which have already enacted similar legislation to provide their constituents with a path to increased federal tax deductions.  
 
The federal Tax Cuts and Jobs Act (TCJA) imposed a $10,000 limitation on the federal tax deduction an individual taxpayer may claim for state and local taxes for tax years 2018-2025 (SALT Cap).  This limitation presents challenges for taxpayers, and in particular, owners and shareholders of businesses structured as partnerships or S corporations. Income generated from the activities of these “pass through entities” is taxed at the owner level at Pennsylvania’s 3.07% Personal Income Tax (PIT) rate.
 
If such an entity-level tax election is made, the pass-through entity would pay tax at the same 3.07% PIT rate on income of its electing owners.  The owners, in turn, would receive corresponding credits.  The net result would be payment of the same amount of tax, but with the benefit of federal deductibility as an expense of the electing business.
 
As of February 2023, 29 of the 41 states imposing a personal income tax have passed legislation similar to this proposal, and another 5 states have active legislative proposals.  This includes nearby states of Connecticut, Maryland, New Jersey, New York State (and City), Ohio, Virginia, and West Virginia (proposed). Aside from Pennsylvania, only the low population states of Delaware, Iowa, Maine, Montana, Nebraska, and North Dakota have failed to enact or currently propose a SALT Cap workaround.
 
This legislation will provide potential federal tax benefits to a large number of pass-through entities, helping businesses of all sizes and income levels.  Over 400,000 pass-through entities file tax returns in Pennsylvania.  On the PIT returns reporting this income, nearly one-third (1/3) related to individual taxpayers reporting less than $250,000 of taxable income.  These are the small business taxpayers who would have the ability to benefit from this legislation.
 
This legislation would align Pennsylvania with similar tax structures in most other states to provide federal income tax benefits and will put federal tax dollars back in the pockets of Pennsylvania small business owners.
 
I respectfully ask for your consideration to join me as a co-sponsor of this legislation and show our support of small business and pass-through business owners as we look to strengthen our state economy.
 



Introduced as SB659