IRS Affirms Shekarchi’s Tax Cut for R.I.

 SALT deduction affirmed to help small businesses


STATE HOUSE – The Internal Revenue Service (IRS) has issued proposed regulations affirming a workaround initiated by House Speaker-nominee K. Joseph Shekarchi to help small-business owners who were negatively affected by the Trump administration’s 2017 tax changes.

The IRS issued a notice that it is proposing regulations that will clarify that state and local taxes paid by a partnership or S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its taxable income. Therefore, the taxes would not be subject to the state and local taxes (SALT) deduction cap on the returns of the owners in the business.

In 2019, Majority Leader Shekarchi sponsored legislation (2019-H 5576), which was later enacted as part of the 2020 state budget, to provide Rhode Island business owners the workaround affirmed by this IRS regulation. Without it, owners of “pass-through” entities such as LLCs, S corporations, sole proprietors and partnerships potentially faced higher federal tax liabilities due to a $10,000 cap on the SALT deduction on federal taxes that was enacted as part of the Tax Cuts and Jobs Act pushed by President Trump and passed by Congress in December 2017.

Rhode Island’s effort was based on a similar bill enacted in Connecticut and was carefully designed to be revenue-neutral for the state.

“While we were always confident that this solution worked within the boundaries of the federal law, it’s great to have this stamp of approval from the IRS. This notice gives business owners in Rhode Island certainty and clarity that they can continue getting the full credit for the state and local taxes they are paying. The pandemic has made this year extremely challenging for businesses of all types, and they shouldn’t be saddled with higher tax liability on top of the other difficulties they are facing right now,” said Speaker-nominee Shekarchi (D-Dist. 23, Warwick).