Blog

Blog

Blog

Beat the Unfair $10,000 SALT Cap with a C Corporation

Published March 23rd, 2020 by Steve Stanganelli CFP

C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:

  • Income Taxes
  • Real Property Taxes
  • Personal Property Taxes
  • Foreign Income and Real Property Taxes

Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,

  • You Can’t Deduct Foreign Real Property Taxes, and
  • Your Combined State and Local Income, Real Property, and Personal Property Tax Deductions May Not Exceed $10,000 ($5,000 on a Married Filing Separate Return).

Your Combined State and Local Income, Real Property, and Personal Property Tax Deductions May Not Exceed $10,000 ($5,000 on a Married Filing Separate Return).

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

Categories

Archives