Main Street Business

#589 The SALT Workaround After the One Big Beautiful Bill (OBBB)

• Mark J Kohler and Mat Sorensen

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Join Mark and Mat as they discuss the powerful SALT workaround in 36 states. You can have unlimited deductions for state taxes for this workaround strategy and exceed the $40,000 with the workaround. 

You’ll learn:

  • The 3 steps to see if you qualify for the SALT workaround
  • The 3 steps to implement it before year-end
  • How to navigate state-specific deadlines and forms
  • Why acting in 2025 is critical for 2025 tax savings

Get a comprehensive tax consultation with one of our mains street tax lawyers that can build a tax strategy plan with an affordable consultation that will leave you speechless!! 

Here’s the link - https://kkoslawyers.com/services/comprehensive-bus-tax-consult/?utm_source=buzzsprout&utm_medium=description&utm_campaign=SALT_Deduction

Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are bestselling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 3:

There's three steps to see if you can use this workaround, and then there's three steps to do it. We want to be focused on this now. Tax planning for 2025 happens in 2025.

Speaker 2:

You want your advisor to be able to put this all up on the board like a chess move and go okay, let's do this, do this, do this and boom. All of a sudden you're saving 20, 30 grand in taxes that you never realized you could.

Speaker 3:

Once you have success as a business owner, your number one expense becomes taxes. So if you want to play a little defense so you're not getting points scored on you from the IRS in your state, that's tax planning. Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen, joined by the incredible Mark J Kohler.

Speaker 3:

We are excited to be with you today talking about something that matters on your tax return. This is about saving on your federal tax return for money you're spending in taxes to the state. That's right. You may be paying taxes to the federal government on money you made but actually had to send to the state. This is called the SALT deduction, which has a cap now. So we want to break this down for you. This is hotly contested in the one big beautiful bill, but some workarounds and some strategies were preserved here for you business owners. So we want to go over that to make sure you understand how to maximize this deduction for state and local taxes you're paying. And Mark's going to break it down for us because he's really dived into this, had personal experience with it. Of course, he's teaching advisors and tax attorneys accountants across the country on the strategies to be implementing for their clients.

Speaker 3:

So Mark what do you think about this?

Speaker 2:

Thank you, and I've liked the way you've explained this before regarding paying tax twice almost on the same money. We'll come back to that, but let me get this right out here right now. There's three steps to see if you can use this workaround, and I'm going to lay those out because you need to know this so that you can have an intelligent conversation with your tax advisor and then there's three steps to do it. So we're going to talk about do I even qualify and what are the three things I need to do it. Now, what I love here is the name workaround, the AICPA. I got to hand it to them. Everybody was calling it a loophole. How they branded this as a workaround is amazing, because in the big, beautiful bill, this was slated to be eliminated and at the last minute, this workaround was left in there. So I like their branding. I'll just tell you that.

Speaker 3:

I like it. Someone at the AICPA knows what they're doing, that's for sure. And you kind of you know where was the American Bar Association and tax lawyers? Leave it to the AICPA. They're advocating for this. This is kind of a punitive tax here. Let me just say why I think this is so dumb. Actually, yes, why, yes, why we had.

Speaker 3:

You should be entitled to the workaround. You should feel good doing the workaround loophole strategy. Let's not call it a scheme, but whatever we want to call it, you should feel good about implementing this. Because here's what's happening.

Speaker 3:

Let's say you make $300,000 a year as a business owner and you're in a high-income tax state and you had to pay $30,000 to the state in taxes, right? Well, at the end of the day, on your tax return to the federal government, you're like I made $270,000, right, because I had to send $30,000 to the state. I didn't get $300,000. I got $270,000. So, federal government, would you tax me like I made $270,000? And they were like no, we're not going to do that. We'll only let you deduct $10,000 of that $30,000. That was kind of the old rule, and this is the $10,000 cap of how much state and local tax you could deduct. So the fact that the federal government limits how much of a deduction you get to take is very punitive, because you're paying tax to the federal government on money you already paid to the state, like you didn't even get that money. So it makes sense that you should have no cap on this.

Speaker 2:

Yeah, and some of you may say well, they increased it to $40,000. It doesn't start to phase down until you make 500 grand. So, matt, in your example the workaround doesn't matter because they had 30,000 in state tax. The new limit's $40,000. They should be okay. Whoa, whoa, whoa. Remember the SALT limitation of $40,000 is state and local taxes, which includes your property taxes. So you might have property taxes on your primary residence and some taxes licensing your vehicles or your RV. All of that goes into that $40,000 figure. So when you slap that $30,000 figure, so when you slap that 30 grand of state tax in there, you've already chewed up 75% of that limitation. Now you've only got 10 grand to write off property tax and other DMV type taxes and property taxes, personal property taxes. So you're already behind the eight ball. So you got to know this does matter because that 40,000 gets chewed up quicker than you realize.

Speaker 3:

Yeah, and I guess that's probably the first tip here, as we talk about three steps to qualify, I know that you have Mark, which is you know if you're making a couple hundred grand a year and you're in like like now that the new cap, by the way, was raised from 10. So it used to be 10, which a lot of really even small business owners, like very small business owners, were getting caught up in this, particularly in higher income tax states. It came up to 40,000 now. So that's the new, where you can just put it right on your personal return. You don't have to do this workaround strategy we're talking about. It's simple you can take that 40K deduction, but if you got more than that, every penny over that, you're paying tax on money to the federal government. You already paid tax to the state on.

Speaker 2:

Yeah, and Matt nailed it, that's number one. You've got to ask yourself and this is the time of year to do this in. Third and fourth quarter is when you want to have that strategy session with your tax advisor, and we'll put a link down below. We've got a very, very affordable tax lawyer specializing in small business for clients all over the country where you can get a consult and say give me a second opinion, is this an issue for me? What are my options? Then you can go to your normal accountant and lay it out for them, unless you have a great accountant that you feel confident talking about this.

Speaker 2:

But here's the point Number one. You've got to say am I butting up against that $40,000 limit? Am I going to have a problem? So you want to be looking at what am I going to put away in charity versus in the SALT, state and local taxes, and am I going to try to write off some medical expenses on the itemized schedule? And I want to know am I going to be itemizing or am I going to be taking the standard deduction? The standard deduction is 30 grand for a married couple and then you're going to say well, I've got more than 30 grand in SALT and charitable contributions, maybe a little medical. And so all of a sudden you're like, okay, I would rather itemize than take the standard deduction and the salt is causing a problem. That's your first idea. If it's not good, you're golden. You may take the standard deduction, itemize and not even max out your SALT. But if you are maxing out your SALT, we go to step two.

Speaker 3:

Yeah, and I think the other thing I'd add in there is on the itemize, you could be having mortgage interest too, pushing you up into that itemizing, of course. Oh yeah, yes, and so that could be pushing you over there. Okay, so let's say I'm hitting up against that, though, and I do have over 40K of state and local tax and I'm going to lose out on the deduction. I'm going to hit the ceiling and get nothing left.

Speaker 2:

Yep. So step two is do you have an S corporation, which is going to primarily be the entity of choice here? You could use an LLC in certain situations. If you're using an LLC for this, you got bigger problems. You should probably have that LLC in an S corp position. So this is part of doing a good, comprehensive review with kind of an outside party. If we don't save you in taxes what it costs to do that review, if we don't save you in taxes what it costs to do that review, we've screwed up. We'll have a conversation with you and we've never refunded someone's money in the last five or six years. For that case, we will find you more write-offs than you will pay us every time.

Speaker 3:

Yeah, what I would say is if you're someone that's doing this SALT deduction workaround, you should have already been doing the baby steps of having an S-corporation already. This is a little more advanced strategy, so we might have to take you back to baby steps if you're not.

Speaker 2:

And that's the exciting part, everybody. Just to digress for a moment when you open up the can on this SALT deduction and you start looking at your S-corp, you're going to start looking at your reasonable comp. Are my family members on payroll or getting 1099s? Am I doing my board meetings? Am I writing off all my travel? Am I writing off all my dining? Am I going to use bonus depreciation this year? Where's my 109A?

Speaker 2:

I mean all of this start is interrelated and you want your advisor to be able to put this all up on the board like a chess move and go okay, let's do this, do this, do this and boom, all of a sudden you're saving 20, 30 grand in taxes that you never realized you could and you're not doing anything crazy or wild or having to go buy some stupid solar project or throw good money at bad just to get a write-off. It's just putting things in the right box on a return is the goal. So step two you know you're going to bump up against salt. Step two do you have an S corporation? And if you have an S corporation, we're in the money, because now we're going to use that S corp as part of the workaround strategy. If you do not have a small business, this workaround is not going to help you. That small business S-corp is critical?

Speaker 3:

Yeah, and it's. You know, even if you knew W-2 earners that are high income and you might have a side hustle that I don't know that you're going to get that that strategy is going to work either. You know we really this income needs to be running through the S-corp, where you're having this salt, this state and local tax being incurred. So sorry for you W-2 earners that are high income in those high-tax states. This strategy is not for you but, of course, the business owner clients here on Mation Revisits Podcast. This is like one of the many things and perks that you get as a business owner. You take so many risks, of course, running and owning a business, but this is one of the perks that you get the strategy to maximize this SALT deduction past the 40K.

Speaker 2:

Yeah, absolutely no-transcript. Are you in one of the 36 states that allow you to do this? There's 36 states that will provide the right tax form to make this happen. 14 states do not participate in this. Now you can go to ChatGBT or Grok. They'll give you the 36 states.

Speaker 2:

I've got an article on this down below that really lays this out beautifully in understandable language and if you're enjoying this podcast, I'm going to lay this all out in that article. But here's why the states matter and here's the strategy. Instead of you trying to deduct your state income tax that you paid, like Matt said, you got 30 grand. You're paying to the state. Normally you would pay for that personally. You got a personal tax return. You pay for it personally. Well, the workaround is, if you have an S corporation, you're going to let the S corp pay that 30 grand for you. So your S corporation writes off the $30,000 in tax that you're paying personally.

Speaker 2:

And this is important that the state tax return allows for this, and only 36 states comply with this or will provide for the strategy. So you write off the $30,000 on the federal return, the federal return and it comes through the state tax return that you got a credit for paying this on the federal return for your S-corporation. So your S-corporation pays, it takes a write-off which reduces your income. So that's where the federal savings is. You're writing it off in your S-corp, then the state return shows it as a credit, a non-refundable credit that you paid for over on your S-Corp tax return. And that's the connection.

Speaker 2:

And so then when you go to do your personal return, your personal state return is going to go. Hey look, I've made this payment over on my S-Corp federal. Give me that credit. Boom. So you get the credit for paying it on the state return. You get the deduction on the federal and it doesn't even show up on your SALT limitation. Now, this is for state income tax, only in 36 states where you're paying state income tax and you want to see if your state allows for this so that you can go through these steps which we're going to come to now, and lay out the three steps to actually make it happen. That's the concept of how you pull it off.

Speaker 3:

Yeah, and I think this is a really critical planning topic because you do need to do running this through the right steps and, as Mark talked about earlier, this is like how you do what to do, running this through the right steps and, as Mark talked about earlier, this is like how you do what matters and you got to make sure you're doing this in the tax year. A lot of people worry about tax planning and they think, oh, it's April 15th or maybe the extension deadline October 15th. Guys, we're just recording history on that tax return. At that point, for the most part, there's a few things you can do. You've got to be focused on this in the tax year right now, which is critical for any of you in 2025, thinking about this, we want to be focused on this now. Tax planning for 2025 happens in 2025. A lot of our clients they're starting at the end of third quarter, beginning of fourth quarter. We're doing tax planning in our law firm, kko Storage storage for those clients.

Speaker 2:

What do I need to be thinking about to get done this year to save on taxes in 2025, on my 2025 return? Yeah, now Matt nailed it. That, of course, is step one. You've got to make the deposit. Your S corporation has to write the check or do the online electronic deposit, which is what all the states pretty much do. Now you would log into your personal state tax portal and you're going to say I want to make a deposit for 2025 taxes and my S-Corporation bank account is going to provide the routing number, account number, or you'll write a check with paper filing, whatever procedure you use to send that in.

Speaker 2:

So that's step one. You've got to plan to send this money in before year end. And some of you are like, oh my gosh, I don't even have that money around. What do I do? Well, cashflow considerations will have to be taken into account and if you're making regular quarterly deposits anyway, you want to make sure that those deposits are being allocated in the proper way, which is really what we're coming to. Step two and Matt, you and I talk about this all the time is just sending the state money is one thing. Letting them know what it's for in the right form is the second step.

Speaker 3:

Yeah, and I would say too on that paying it on the first part is, if you have regular payments going to the state from your personal account for your personal estimated tax at the state level, stop those. It's not like you're paying more. This is being paid in lieu of right. We're not paying more state tax. We're only paying the state and local tax that we have to pay right. But the trick here to be able to use this workaround is don't pay it personally. Have it being paid from the company bank account. So for many of you that are paying on a quarterly basis right now, you got to reassess the strategy now. You got to refocus on this, on where that money's coming from.

Speaker 2:

No, perfect. And step two. It may sound a little odd that I'm calling this a step, but it really is Paying. It is one thing. Tying it to the right form and making sure you don't miss any deadlines is step two. For example, in New York, if you're going to make this state tax deposit for 2025, you have to do it by September 15th. And we're coming up on that here in a month. And so the state of New York says oh, you want to do this? All right, we want to see all this money deposited by September 15th because we'd love to earn interest on that for the fourth quarter if we're going to give you this little benefit. So the time value of money coming into play is always better to get that write-off than worrying about annual interest for three months or four months. But New York has a deadline of September 15th.

Speaker 2:

California buckle up everybody. The deadline is June 1st to file a form that says I'm going to do this and you have to send in at least a thousand dollars. So I hate to say I'm sorry you're hearing this podcast later in the year. If you're in California, you'd want to call your accountant and go what the hell? Why did I not send in $1,000 by June 1st, with making the election to do an early state tax deposit procedure. Now your accountant may have already done this for you you don't know so if you're making regular state deposits. This is why having a very engaged conversation with your tax advisor in third and fourth quarter is so critical again.

Speaker 2:

And so the moral of the story is all 36 states do this differently. In the state of Utah it is a non-refundable credit which I'm getting into almost step three here. Credit which I'm getting into almost step three here is that if you don't use all that money for 2025, you can push it into 2026. So now you're getting a bite at the apple for next year at the same time. Now there's a little loophole there I'll talk about as well. But step two is know your state, know the deadline, know the form, know the procedure.

Speaker 3:

So important and I would say for many of you that are business owners, of course, know that your advisor knows you're doing this, know that you have a good tax advisor account at first, all but actually understands the strategy and can execute on it for you and then be coordinating with them in terms of where the state you're at, where you have your state and local tax that you need to be paying, and they should be coordinating with you on this. So this should not be on your list. Your list is yours. I understand the strategy here. Let me coordinate with my professionals and advisors and have them help me get this done, because, as you're listening to this, you could be. I can hear people already like, oh my gosh, this sounds a little complicated, it's not. You get in the routine of doing this and the habit of doing it and you do it this year and then you're going to do it next year and the following year and it just gets into this pace of how you do it.

Speaker 2:

Yeah, and we should have mentioned this probably back in step one of your analysis. If you're making more than 500 grand a year, god bless you. So glad, you're so fortunate that you're in the 1%. If you're making more than 500 grand a year, well, that 40,000, it starts to phase down back to 10. So by 600 grand of adjusted gross income, that 40,000 is gone, it's back down to 10. And so this SALT becomes even more important.

Speaker 2:

And here's an interesting nuance and, matt, this is what's cool is that if you're phasing out with the SALT, it's based on your federal AGI and remember, salt includes your property taxes too. So if you're making over 500 grand a year, you might have a higher than average cost of home, maybe in a mortgage, maybe higher property taxes than the average person too. So you're really looking at state income tax and property tax. That's going to be killing you. And if you're making more than 500 grand, if I do this work around strategy, I'm actually lowering my AGI to keep my SALT closer to 40. So I find between 500 and 600 grand of income and I use the work around, I'm preserving more of that 40 grand rather than having it phase out so quickly so I can throw my property taxes in there.

Speaker 2:

So, there's some yin and yang here, that's kind of I guess I'm a geeking out on this, but it's kind of fun yeah.

Speaker 3:

I was even going to say some of that like property tax stuff. You're not used to paying it out of your business, right, but you're still going to have at least 10 left and depending on your optimizing it, it, as you said there you could be even get up to the 40s still left. So even if you use the pastor any taxes what this the pt was called pastor any taxes kind of workaround strategy um, you still are.

Speaker 2:

Have that deduction left on your personal for that property taxes yes, yeah, yeah, because the property tax, your S-Corp cannot pay that for you and use this strategy. It's only for income tax.

Speaker 3:

So we want to try to Maybe a business vehicle or something like that, I guess. Or like well, it's only income tax, okay.

Speaker 2:

Yeah, yeah, it's for your primary residence. Property tax is an itemized deduction up to a certain value, so you're going to have to look at that in this equation. Now let's back to the final step. So you're going to put the money away, you're preparing to do it, you're going to look at your state deadlines and the forms and the procedure. The final step is being engaged on the back end of this when you go to do your 1040 tax return in the spring. You've got to be a little watchdog and look for this. I know that sounds a little crazy and you don't have to be trained in tax preparation to do this, but you've got to be able to talk about it with your accountant. A little reveal here.

Speaker 2:

This happened to me. I always use an outside party to help prepare my returns because I'm in the weeds. I want to have a second set of eyes on it. And a couple of years ago, when the workaround was just starting to get more and more popular, I told my account make sure you do that. And I took a glance at it and I was like okay, perfect. Well, it was off by one box on the state return, because I file in three states, because we have offices in three states and it was off one box. Well, it required me to amend my return. Even though I made the deposit, it wasn't reported in the spring in the right spot. So I made the deposit right with the right form, but then I didn't report it properly on the 1040 and the state tax return. So that connection occurred so I had to amend the return.

Speaker 2:

Well, guess what happens when you amend a return, you get audited. So this tax auditor from the state calls up and wants to look at it. And there was no problem and it wasn't like a big audit per se, but it just created another month of headache. So I had to get on a phone call. Oh look, and we. But it just created another month of headache. So I had to get on a phone call. Oh look, and we got the credit and it was all good.

Speaker 2:

But there's a lot of strategy involved here, because you may be still making deposits on your spouse's W-2 for state taxes. Those are refundable. But a lot of times this strategy is not refundable. So you wanna also look well, how much is my spouse putting in on state tax deposit, how much am I doing in my S-corp and how much is going to be refundable if I, because if I aim too high, I don't know if I want to lose out on that use of the money for another freaking year. So this is the beauty of having a good tax advisor, and I'm going to say it one last time please get a comprehensive tax consult with one of our tax lawyers that can walk you through this, show you what to be aware of, so that you can quarterback your team. You don't have to do it. You don't have to be the running back and the receiver and all these positions, but you got to be the one on the field ready to yell Omaha and just call a different play if you have to yeah, a little peyton manning.

Speaker 3:

Um, all right. Well, I think this is a a great strategy for many of you, and again, this is a little high income. So if you're like, um, I'm, I'm good, I'm under this 40k, I don't need to worry about that great, we got an increased deduction. A lot of you that have smaller businesses where you don't need to worry about this. You, you're going to have that higher deduction.

Speaker 3:

But this pass-through entity deduction is an incredible strategy. It's one about threading the needle. I like to think of it more of a loophole. We can use workaround. That sounds a lot more. That sounds better. In Washington DC, nobody likes to say the word loophole. That's like a swear word. It's a workaround. But, mark, awesome. I love how you broke that down though, too. Three steps to qualify, three steps to implement that, to take advantage of this deduction, and this is something that could. There's literally tens of thousands of dollars in tax savings and, for many of you, even higher, higher incomes. I mean, you could be very high income person and this could be hundreds of thousands of dollars in tax savings by doing this properly.

Speaker 2:

Yeah, it's just it can get. I know I'm going to throw out one thought I want you guys to have. The trick to life I'm learning more and more as I get older is having the right mindset If I have a mindset of expecting perfection or someone else to take care of this for me, or I shouldn't have to worry about this. We know crap happens and it's not always going to go perfectly, but we set ourselves up for feelings of frustration, regret, anger, all these things that are just not productive. And so I would challenge you to I know this is going to sound crazy everybody, but I would challenge you to think of tax planning as fun, and here's why I would suggest it be fun.

Speaker 2:

Have you ever gone to the store, especially a black Monday, black Friday, whatever they are? And you go and it's more about how much you're saving than what you're spending, and it's pretty fun. You're like man, I'm getting savings everywhere and some of you are like that. In certain acquisitions in your life. You're going to really drill down on that car purchase or that cell phone purchase. I'm going to stick it to them and you know it becomes a challenge and fun and your tax return can be that way you can find workarounds, you can be strategic, you can learn the balancing act and the yin and yang of certain write-offs, and you don't have to be a rocket scientist to do this. It's not that overwhelming and it can be really exciting and fun. And when you go in with that mindset, you're going to have to do the work anyway. So why not try to create a scenario where it's a little more enjoyable?

Speaker 3:

Yeah, and I come just from the mindset of it's really hard out there to go make money and earn it and we want to keep as much of it in our pockets as possible. And tax planning once you have success as a business owner, your number one expense becomes taxes. So if you want to play a little defense so you're not getting points scored on you from the IRS in your state, that's tax planning. So maybe we want to gamify it here or something. But we of course, love tax planning and helping our clients across the country save on taxes.

Speaker 3:

And it's strategies like this and it's not a one thing either. It's not just like oh, I do this one thing, I save taxes. No, it might be 10 or 12 things and we might look at 30 or 40, but you end up implementing 10 or 12. That really move the needle and help you save taxes. The nice thing is you get a good plan, you get a good structure, you can get focused on that, what works for you, and then it gets a little more routine. You still want to learn and develop new strategies. Listen to the podcast. We're, of course, updating you on new things we learn and changes in the law, but it really moves the needle and it can be very meaningful to you as you're trying to go out there and grow and build well, Well, I love the way you said that and we'll wrap it up on that.

Speaker 2:

You just gave it the right term. I love the way you said that and we'll wrap it up on that. You just gave it the right term gamify, Gamify this process, and if you're a gamer, you know there's not one strategy that's going to help you win any particular game and be on the leaderboard.

Speaker 2:

It's a combination of things, and so if you can gamify this tax planning, it might give you a little extra mojo to get through the process, and I challenge all of you to do a strategy session before year end as soon as possible, frankly, but we're here for you. We're excited to be a part of your life. Thank you for listening to this podcast. Please share it with someone. Give us a five star, two thumbs up, high five, 10 out of 10, whatever the hell. We appreciate it, and we will be back here next week on the Main Street Business Podcast trying to talk about things that actually move the needle, as my partner just said, and make a difference in all of our efforts to better live the American dream. Thanks so much for listening and or watching on YouTube. We'll see you next week.

Speaker 1:

Thank you.

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