The fiscal year 2020 state budget bill enacted by the Rhode Island General Assembly and signed into law by Governor Gina Raimondo contains seemingly exciting news for many business owners with Rhode Island source income. Rhode Island business owners should be aware though that ongoing Treasury Department efforts may undermine the General Assembly’s efforts. The budget bill, House Bill 5151Aaa, amends the Rhode Island General Laws to enact a new state-level workaround to the much ballyhooed prohibition on the deduction, for federal income tax purposes, of state and local taxes in excess of $10,000. This limitation is commonly referred to as the “SALT cap.” The SALT cap workaround is applicable to owners of pass-through entities including partnerships, S-corporations, trusts, limited liability companies and even sole proprietors for tax years beginning as of January 1, 2019.
The SALT cap is one of the numerous tax reforms enacted by the Tax Cuts and Jobs Act. The SALT cap has received significant attention from taxpayers and the media, particularly in “high tax” states like Rhode Island and Massachusetts because the SALT cap has a direct economic impact on a high number of taxpayers with diverse levels of income. The workaround enacted by the Rhode Island 2020 state budget bill represents the latest attempt to bypass the pernicious SALT cap. The viability of Rhode Island’s workaround is uncertain though given the Treasury Department’s ongoing efforts to curb similar workarounds enacted by other states. While the mechanics of Rhode Island’s workaround are unique, taxpayers should stay tuned for a potential Treasury Department response which may blunt this workaround’s effectiveness.
The workaround is enacted as new Rhode Island General Laws Section 44-11-2.3 and functions as an election to pay state income tax at the entity rather than owner level. The workaround is voluntary. Eligible pass-through entities can elect to participate by filing an annual election with the Division of Taxation. After submitting the election, the eligible pass-through entity files an entity-level state income tax return and pays tax on its Rhode Island income at the rate of 5.99%. The eligible pass-through entity then allocates and reports each owner’s pro rata share of Rhode Island income and tax on the owner’s Schedule K-1 for the year.
When the owner then determines his or her federal adjusted gross income for Rhode Island income tax purposes, the owner adds back to their personal income his or her share of the entity’s income giving rise to the entity-level tax (on which tax was previously paid at the entity level). After the owner’s Rhode Island income tax liability is determined, a credit against Rhode Island income tax is then provided equal to the owner’s share of the Rhode Island tax payment made by the pass-through entity with its return. An ancillary benefit of this workaround is that by electing to pay Rhode Island income tax at the entity level, the non-resident withholding requirement of R.I.G.L. § 44-11-2.2 is abrogated. The Rhode Island Division of Taxation has stated that forms and procedures to participate in the workaround will be forthcoming (Advisory 2019-13).
This latest legislative attempt to bypass the SALT cap is seemingly exciting news for taxpayers with Rhode Island source income, but the long-term viability of the workaround remains uncertain pending additional Treasury guidance. The best strategy will depend on the unique facts and circumstances of each taxpayer and, depending on each taxpayer’s unique situation, other SALT cap workarounds may be available.
The tax attorneys at McLaughlinQuinn LLC regularly represent clients in connection with tax planning for the complex interplay between federal and state income taxes. For more information on this newsletter, contact Cory J. Bilodeau, Esq., Tax Planning Partner, at (401) 655-2203 or via email at
