By: Mark Glennon and Ted Dabrowski
Federal tax law changes restricted the deductibility of state and local taxes, including property taxes, which are high in Illinois. In November 2020, however, the Internal Revenue Service issued guidance on how pass-through entities such as ‘S’ corporations and partnerships can avoid the cap.
It requires an election by the business to be taxed at the entity level on the businesses income, which Illinois at this time does not permit.
But legislation is in the hopper to fix that.
It’s Senate Bill 2531. The bill is sponsored by Sen. Win Stoller (R-Germantown Hills) and it has picked up additional sponsors from both parties. It would allow a small business to elect to be taxed at the entity level, instead of letting the income pass through to their personal return. The owner would then claim an offsetting credit on their state return. It passed the Senate Revenue Committee with a vote of 9-0 and now goes to the Senate floor for further consideration.
We hope and expect the bill will become law. While we support the $10,000 federal SALT cap, it’s entirely appropriate for Illinois to facilitate exceptions recognized by the IRS, just as other states are doing. At least fourteen other states have passed or are in the process of passing similar legislation. The legislation could help up to 400,000 Illinois small business owners save thousands of dollars annually on their federal tax filings, according to Stoller.
The bill, which is rather simple, would have no effect on Illinois tax revenue and only benefit Illinois businesses at the federal level.
It’s particularly nice to see bipartisan support form around legislation that will help Illinois small businesses.
Further background on the guidance issued by the IRS in November is here and here.
Audio and summary 
If this bill passes, say goodbye to local control over all Illinois parks and expect to see open drug and alcohol use, needles, no sanitation and fire hazards, but no ordinary park users.
Not sure I understand the economic or moral justification for having individual income subject to a SALT cap but not business income. Why should the person who earns 100k from a job be treated differently than the person who earns 100k from a partnership or a proprietorship? At least with capital gains, you can argue for lower rates by pointing out that some of those gains are illusory because they don’t account for the erosion of capital due to inflation. But I don’t see a similar argument here. Also, as I pointed out before, having the SALT cap be the… Read more »
You have it backwards. Dem legislatures in blue states always liked that when they have ginormous state income taxes and local prop taxes, their citizens got a federal tax break at their marginal federal tax!! That eases the pain of higher earners in their states. But it also means that a high earner pays significantly less fed tax than the same highearner in a low -taxed state. That system was obviously designed by Democrats. And it stinks. Trump fixed it to a good extent! And thx to a-hole BJ Clinton , we also STILL have the AMT, he vetoed its… Read more »
How about no taxes? No, I’m serious. If the federal government can just borrow and create money, there should be zero reason for taxation, when the taxes collected before covid amounted to less than the yearly federal budget. States already get lots of their funding from Washington (soon to be 51st state). Here is why: 1) Government views itself as smarter than the people and infallible (this is a result of lack of consequences for those in government when they break laws you or I would go to prison for). Government demands obedience and compliance. It’s a hammer and needs… Read more »
Mark, wouldn’t this fed tax break/SALT workaround for businesses ,if passed, just give jb more of an excuse to inacte his $1 billion in new taxes on business by closing loopholes?
Perhaps, but this is a free lunch offered by the IRS so I don’t see why we wouldn’t take it.
SALT limitations should be in effect because tax structures vary by state. Sales taxes, gas taxes, excise taxes are not deductible. Smart states have a broad base.
This makes sense under the assumption the small businesses are profit-making entities.
Good point.