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Missouri enacts SALT Parity Act creating 2022 income tax saving opportunities for partnership and S-

Missouri enacts SALT Parity Act creating 2022 income tax saving opportunities for partnership and S-

February 11, 2023

On June 30, 2022, Governor Mike Parson signed HB 2400 which contained the SALT Parity Act. The Act is similar to laws enacted in many other states in response to the 2017 Tax Cuts and Jobs Act’s (TCJA) limitation on the deductibility of state and local income taxes.

Before the TCJA, most individuals who itemized could deduct their state and local taxes paid, regardless of the amount. The TCJA limited the total state and local tax deduction to $10,000 for most taxpayers (the “SALT Limit”). Included in the $10,000 SALT Limit are property taxes, real estate taxes, and either income or sales taxes paid. Many business owners pay more than$10,000 so the SALT Limit causes significant state income taxes paid to be nondeductible on the Federal return.

The SALT Limit applies only to individuals, so C Corporations who pay state taxes may deduct substantially all state taxes paid on their Federal returns. As a result, the SALT Limit disrupted a longstanding parity between Corporations and Flow-through Businesses (S Corporations or Partnerships). Although state income taxes paid are direct expenses imposed on business income, taxes paid by Flow-through Businesses are paid at the personal level, triggering the SALT Limit only for businesses filing as Flow-through Businesses.

Following the TCJA, states started to develop workarounds to allow their taxpayers to get a Federal tax deduction for the State income taxes paid on business income. Missouri now joins roughly half the states in adopting one type of workaround endorsed by the IRS.

Missouri’s SALT Parity Act is very similar to those created in other states. Flow-through Businesses will be permitted to elect to pay Missouri income taxes at the business level on behalf of their owners. These Missouri business taxes will be deductible on Flow-through businesses’ Federal returns, resulting in a smaller amount of Federal taxable income being passed through to the owners’ individual tax returns.

The new election available under the Missouri SALT Parity Act will benefit many business owners, but not all. In many situations, business owners will save Federal income taxes by making the election under the SALT Parity Act without materially increasing the Missouri income taxes paid, resulting in net income tax savings.

In addition, HB 2400 clarifies owners of all Flow-through Businesses will receive a credit against Missouri tax on their personal returns for taxes paid to other states under a SALT Limit workaround. Under prior law, the availability of a Missouri credit for taxes paid to other states was less clear.

It will be important to analyze every business carefully to ensure the election is made in the right cases. If the business operates in multiple states, then each state should be considered and the election may be beneficial in some and not others, depending on the rules for each state.

The Missouri Department of Revenue will promulgate rules to inform businesses how to make the election, pay the tax, and report to owners the tax paid on their behalf. We will share more information as it becomes available.

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