Senate Republicans have long discussed taking a different approach to tax reform from the House — in particular, by focusing on permanency — and a draft released June 16 makes good on that. But another departure in the Senate draft is the treatment of the state and local tax (SALT) deduction, including for pass-through entities.
The Senate Finance Committee shared tax reform provisions to be included in the chamber’s version of the One Big Beautiful Bill Act (OBBBA), as well as a section-by-section summary, Monday evening.
PwC’s Rohit Kumar said his take is that “the Senate, on the whole, has far more permanent policy than the House.” And the Senate’s few temporary policy provisions make sense, Kumar told Checkpoint. Those include campaign promises to exempt tips and overtime from tax and provide tax relief to seniors — all of which, unlike 2017 Tax Cuts and Jobs Act extenders, are “brand new policy.”
But the Senate draft also offers a different take on the state and local deduction cap. While the House settled on a $40,000 cap with income phaseouts, the Senate set forth a $10,000 cap as a placeholder. “[T]he amount of the individual SALT cap is the subject of continuing negotiations,” reads the Senate Finance summary.
Kumar wasn’t surprised by what he called Senate Finance Chair Mike Crapo’s (R-ID) “opening bid” on SALT. “Senate Republicans did not think that the SALT cap needed to be any higher than $10,000, and I bet if you polled them, even publicly, you get a majority that thinks the cap should be zero,” Kumar added.
And the math is different for the Senate, which is using current policy — a $10,000 SALT cap — as a baseline, said EY’s Ray Beeman. For the House, the $40,000 SALT cap was “the biggest revenue raiser in the bill, because the baseline was zero after this year,” Beeman told Checkpoint. But the Senate is “leaking money on SALT if they do anything beyond $10,000,” he added.
PTET SALT deduction approaches.
The Senate draft also departs from the House in its approach to the pass-through entity tax (PTET) SALT deduction — a topic of high concern to the accounting community.
Kumar summed up the difference: The Senate approach “does not single out professional services pass-throughs for derogatory treatment” but rather imposes “a new limitation” for those benefitting from PTET SALT deductions in the 37 or so states that have such a regime.
Beeman said his understanding is that the House bill approach is to “basically differentiate between” a specified service trade or business (SSTB) as defined under Code Sec. 199A and other pass-through entities. According to Beeman, the House “killed PTET for those groups” — which include accountants, lawyers, and doctors.
The Senate draft, however, would “restore PTET for everyone, without differentiating between SSTB or not,” said Beeman. But the Senate has also proposed limits for all pass-through entities, which Beeman explained as “the higher of $50,000 — $40,000 plus your $10,000 cap, unless you’ve used it somewhere else — or half of what you’d otherwise get.”
What that limit amounts too, as Beeman understands, is that “if your state and local tax deduction is under $100,000, you’re going to get the $50,000. If it’s over $100,000 you’re going to get half of that.”
“If you’re an SSTB, this is an improvement” over the House bill, Beeman stressed. Kumar, too, said that “if you were somebody who was getting zero under the House bill, this is a better answer.”
But the American Institute of CPAs still sees room for improvement. The group “appreciates the Senate Finance Committee’s efforts to improve and correct the targeting of SSTBs in the House bill,” AICPA President and CEO Mark Koziel told Checkpoint. But concerns remain about “the inequitable treatment of pass-through entities compared to corporations.”
“While the Senate bill is less punitive to SSTBs than the House version, it would still result in a tax increase for all pass-through businesses, such as CPA firms,” Koziel added.
What might the final bill include?
As far as whether the Senate provision will stick, Beeman was unsure. The current, generally applicable $10,000 cap is still being negotiated, and whether that and the PTET provisions “run independently” or have “some kind of connectivity” remains to be seen, Beeman explained.
“I never really got an answer for what the principal basis was for carving out those pass-throughs,” said Kumar, referring to the House bill’s treatment of SSTBs. But to him, it really comes down to “whether or not you think these PTET regimes are allowing a business to deduct their ordinary expense … or if you think this is some sort of loophole.”
Kumar referenced a footnote in the 2017 Tax Cuts and Jobs Act conference report which he contends shows “this is not a loophole; this was entirely intended.”
Former Ways and Means Chair Kevin Brady (R-TX), “had every intention of allowing pass-throughs to deduct their allocated state income tax liabilities,” Kumar added. “It’s a partnership business expense. It just happens to flow through the individual return.”
This article was updated to include comments from AICPA President and CEO Mark Koziel.
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