Tax reform and the proposed changes have gotten a lot of attention and coverage in the media, including what these changes might mean for small business, entrepreneurs, as well as larger corporations. One proposed change, however, may potentially have a direct impact on you as an individual, and the business that you are operating--the changes to the SALT deduction.
The SALT deduction, or state and local taxes, is already receiving attention as a proposed change that might be controversial for higher income states, but it is important to recognize that the possible SALT changes are a component of broader reforms. Taking a broader view of these changes, and recognizing that these changes are linked with other possible changes, is important for every entrepreneur attempting to navigate this rapidly changing landscape.
As a CPA, taxes and proposed changes to the tax code are some of the most common questions I have heard from clients and colleagues since these changes were made public. Something you and I know both is important, however, is analyzing the impacts that these changes, both individually and within the broader context of tax changes, and how it will impact your business.
Let's take a look at some of the details that may have the largest impact on you and your business:
1. SALT taxes apply to brick and mortar and online businesses.
State and local tax deductions are important for any entrepreneur who does business across state lines, and especially for business located in smaller states, this will inevitably constitute a sizeable percentage of your business.
Taking a high level view into what these deductions mean, let's take a look at one scenario.
Under current tax laws, if an individual or a business earns money in New York, and is headquartered in New Jersey, state and local taxes are due in the state where the income is earned (NY), but will also be part of the taxes due in the state of residence/headquartered (NJ).
Making this potentially more complicated is the fact that e-commerce sales, and the cross-state sales that come with shipping goods (or providing services) across state lines are also under review for potential changes.
Currently, if no changes take effect, the taxes paid in the state where the income was earned (NY), will partially offset taxes due in the state of residence (NJ) or where the business in headquartered.
This may sound abstract, but if your business does business online, or is located near any state boundaries, this is an issue you and your CPA, most likely, are already discussing.
2. SALT changes are part of broader tax changes.
The proposed tax changes include reforms to what will be taxed as business income, what income will be included in your individual tax return, and what entrepreneurs have to do to qualify for certain deductions. It may seem overwhelming to integrate all of these changes into your business, but it is something that you, your CPA, or you and your financial advisor should be talking about on a continuous basis.
Layering these changes together mean that, although your business may have a negative or positive impact as a result of proposed SALT changes, some of these SALT changes may be offset by changes to what will be classified as business or individual income. Specifically, if the business tax rate for an LLC is reduced to lower levels, such as 15 percent, this may offset any increased state and local taxes owed by a business under new regulations versus new regulations.
3. It will not happen overnight
As recently as this week, there have been contradictory statements, changes, and announcements about what tax changes will happen, how quickly they will occur, and what the ultimate impact will be on small business. One change that might be most important for you and your business is the reality that these proposed changes, even if they are implemented, might be phased in over a multi-year period.
Put another way, you should not be afraid of headline risk when as it pertains to possible tax changes. As of this writing there is no comprehensive tax legislation before Congress, and is estimated to only be submitted by the end of 2017 or early 2018.
The idea of analyzing changes to the state and local tax deduction may not seem like a particularly exciting topic, but it is one that will have a sizeable effect on how your business operates. Taking a broad point of view, understanding how these changes might impact you and your business, and working with your CPA or financial advisor can help you be positioned to benefit from these changes while also staying ahead of the tax curve.