The State and Local Tax (SALT) deductions have a cap of $10,000. We want to teach you how to leverage both your C Corp and a land trust in order to beat that cap.
Keep in mind, a “C Corporation” causes double taxation for business owners. Because of this, most people avoid it like the plague.
Typically, an “S Corporation” will provide a lower overall tax outcome. However, if you utilize a land trust, a C Corp will provide the best outcome. This is because it can bypass the $10,000 SALT deduction cap.
Let’s dive a little into what S.A.L.T is all about.
The S.A.L.T deduction cap was introduced with the Tax Cuts and Jobs Act on January 1, 2018.
Prior to this, you could deduct your itemized deductions on your form 1040, which is your personal form, under schedule A with no limit. This includes your income tax, real property tax, personal property tax and foreign income.
At this point the Tax Cuts and Jobs Act made two big changes:
- You cannot deduct foreign real property taxes
- Your combined state and local income real property/personal property tax cannot exceed $10,000 or if you are married $5,000 per return, filing separately.
So, if you operate your business as an S Corp, or an LLC taxed as an S Corp, it passes its net income to you as an individual taxpayer. This causes you to pay your states’ income tax, which is capped out at $10,000.
This means everything over $10,000 cannot be deducted and is counted as a pure loss. You’ll find yourself paying more in tax just because of this cap.
But, spoiler alert, there’s an exception to this rule!
The $10,000 only applies to individuals so it does NOT apply to C Corporations.
So if you operate your business as a C Corp and this pays for your state income tax, you get to deduct the full amount.
Let’s look at an example.
Say you’re a business owner in California with an S Corporation, you pay yourself $70,000 in wages and your net income (or pass through income) of your S Corp is $100,000.
This means you’re at a 24% federal tax bracket and a 9.3% tax bracket in California. So, your total tax on your income is $28,500. That’s $9,200 for California and $19,300 for the federal.
Following so far?
Let’s say your property tax is $10,000. Given the fact that your total state and local tax is $19,300, $9,300 of that is not deductible.
Do you get what just happened? You lost that deduction.
You’re now going to pay 24% more on $9,300 than you did the year before. That’s a loss of a quarter of your deductions!
The one advantage of that structure is this person is an S Corp which means they get qualified business income deduction 199A. If they operated at a C Corp they only pay 21% then the state rate of 8.84%. That means the entirety of that $19,300 would’ve been deductible under the C Corp.
Here’s the good news, over here at BollitProof we like to have the best of both worlds.
That’s why we recommend structuring a land trust for personal property tax.
This will have a large impact on the overall state and local tax. If you utilize the land trust, which we recommend you use Shepard and Shield for this, you can actually deed your property through a quitclaim deed into a land trust. The beneficiary of the land trust would end up being the payer of that tax, which turns them into a C Corp.
That way you can use both a C Corp and an S Corp to get the full property deduction. Utilizing the S corp allows you to not have to pay self employment tax and qualify for a 199A deduction.
Remember, BollitProof wants YOU to have the best of both worlds.