Tax filing season has come to a close, and most Rhode Islanders have now seen the effects of the sweeping changes made to federal tax laws on their 2018 returns.
Unfortunately, many small business owners are among those who may have found themselves paying more as a result of new tax laws that limit their credit for paying state and local taxes.
At a time when small business owners face more than their share of struggles in terms of competition from online businesses and behemoth corporations, they should not have to shoulder a greater tax burden.
For that reason, I’m sponsoring legislation (2019-H 5576) to provide a work-around for owners of “pass-through” entities whose state and local taxes exceed the new $10,000 cap on the state and local tax (SALT) deduction on their federal tax returns. Based on similar legislation enacted in Connecticut last year, my bill is carefully designed to be revenue-neutral for the state.
Since 1913, federal taxpayers have been allowed to deduct the full amount of their state and local taxes from their federal taxable income under the SALT deduction. However, the Tax Cuts and Jobs Act, pushed by President Trump and passed by Congress in December 2017, now limits the SALT deduction to $10,000 for tax years 2018 through 2025. This could add up to a significant increase in tax liability for many taxpayers across the nation and here in Rhode Island.
In Rhode Island, 33 percent of filers use that credit, and, on average, they claimed $12,434 in 2015, according to research by Pew Charitable Trusts. Rhode Island is one of 19 states where the average SALT credit exceeds the new $10,000 cap.
My legislation allows pass-through entities, such as limited liability companies (LLCs), S corps, partnerships and sole proprietorships, to pay the state tax on their business income, instead of passing it along to their partners to claim on their personal income tax returns, as is the usual practice. The bill also allows a credit the partners can take on their personal and corporate state income tax returns to ensure that the business’s income isn’t taxed twice. If passed, the changes would take effect for the 2019 tax year.
This bill would allow small businesses parity with large C-corporations, which are able to deduct their state and local taxes before paying federal income taxes.
Our small businesses are the backbone of our economy, and face enough challenges without being saddled with new tax burdens by President Trump’s tax plan. We’ve found a viable method to help their owners get credit for the taxes they already pay, so their businesses are not disrupted, forced to make cuts to their workforce or worse, to close. My goal here is to prevent the Trump tax plan from hurting small businesses, so they can thrive here in Rhode Island and continue to contribute to our economy and the rich character of our state.
House Majority Leader K. Joseph Shekarchi is a Democrat who represents District 23 in Warwick.