The federal cap on the state and local tax (SALT) deduction, implemented under the Tax Cuts and Jobs Act of 2017, limited the amount of state and local taxes individuals could deduct on their federal income tax returns to $10,000 per year. This cap primarily affected taxpayers in high-tax states where property taxes and income taxes were substantial.

To circumvent the SALT deduction cap, some states have implemented or explored the option of allowing pass-through entities to pay state taxes at the entity level. By doing so, the state tax paid by the entity becomes a business expense deductible at the federal level, rather than a personal itemized deduction for the individual owners.

This strategy is sometimes referred to as the “SALT workaround” or “SALT cap workaround.” It aims to mitigate the impact of the federal SALT deduction cap by shifting the deduction from individual taxpayers to the pass-through entity itself.

The IRS has issued guidance expressing skepticism and intends to scrutinize such state-level arrangements. The Treasury Department proposed regulations in 2020 to counteract these SALT cap workarounds, which would recharacterize certain entity-level taxes as nondeductible payments or increase the individual owners’ tax liability.

It’s important to note that the specific rules and implications of the SALT deduction cap and any related state-level workarounds can vary, and individuals should consult with tax professionals or review current tax laws to understand the applicability and potential consequences in their specific situations.