Possible Way to Beat the $10,000 Limit on Personal Tax Deduction

March 2nd, 2020 at 7:37 PM

C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs. 

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome. 

But for some of you, the C corporation could provide the best tax outcome, especially since you can bypass the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA), with a C corporation. 

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes: 

• Income taxes
• Real property taxes
• Personal property taxes
• Foreign income and real property taxes

Tax reform took two direct actions against your itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018, 

• you can’t deduct foreign real property taxes, and
• your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).

If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap. 

C Corporation Loophole 

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Schedule A. The limit does not apply to C corporations. 

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return. 

How on earth do you figure out which is best? 

Mark S. Fineberg, CPA