Why the PTET SALT deduction is the AICPA’s ‘No. 1 priority’

It’s been a dizzying few months since Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy, last appeared on the Journal of Accountancy podcast. In fact, just the past week has been chock full of tax-related developments, mainly in Washington.

Reflecting the news, this episode is publishing the same day it was recorded. In the Wednesday morning conversation, Lauridsen details the AICPA perspective on several aspects of the budget bill that could be voted on soon by the full House of Representatives.

She goes into detail about the passthrough entity tax/state and local tax deduction, also known as the PTET SALT deduction, and why the AICPA is urging that deduction be preserved.

What you’ll learn from this episode:

• The status of the House budget bill.
• An explanation of the PTET SALT deduction — what it stands for, why it’s complex, and why it’s the AICPA’s “No. 1 priority.”
• Some of the “wins” in Lauridsen’s mind related to Sec. 529 accounts and the Form 1099-K reporting threshold.
• The top concern from a survey of members just after tax filing season.
• What Lauridsen means by “fractures.”

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Welcome back to the Journal of Accountancy podcast. This is Neil Amato with the JofA. This is a special collaboration episode with the AICPA’s Tax Section Odyssey podcast. I’m joined again by Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy.

Suffice it to say, there’s a lot going on in Melanie’s world, as we record on Wednesday, May 21. So Melanie, welcome back, and we’ll get right into it. The tax bill that’s now part of the massive overall House budget bill: First, where, as of this recording, does it stand?

Melanie Lauridsen: Well, Neil, this is the big tax package that we’ve been waiting on, and right now, the House introduced the bill. It then had to go through the Budget Committee, and as of last Friday, it got rejected, and some negotiations have been going forward, but then last Sunday, a couple of days ago, it was approved to move forward within the House.

And as of 1 a.m. today, they were having negotiations, and we actually expect to see a manager’s amendment of this bill. This package is also the reconciliation bill. Like I said, it’s one of the packages we’ve been waiting on, and one thing to know is that all the provisions in the bill have to have a budgetary impact in order to be able to make it into the reconciliation bill.

Amato: Lay out the path legislatively for this bill. You say it’s gone through committees. What’s the next step on the House side, and then how does the Senate again get involved?

Lauridsen: So the House, actually Speaker (Mike) Johnson came forward and he said that they had a goal to be able to have the House bill be introduced and passed by Memorial Day weekend, so that’s here in a few more days. That’s an aggressive timeline, but so far, they’ve been doing what they need to do in hopes to be able to make it into that deadline.

Once it passes the House, an identical bill in order for it to pass through the Senate would have to be introduced for the package to then eventually become law. Now, a lot of bumps are on the road, and a lot of milestones need to be achieved. There’s a lot of work that still needs to happen even if the House were to pass a bill.

Now the Senate has said that they’re hoping to move something pretty quickly, and the administration has requested a final package to be approved by July 4. Again, these are aggressive dates and timelines, and like I said, every time they hit a bump, that date could slip.

From our perspective, we would ideally like to see something happen sooner rather than, say, the tail end of the year or in the beginning of next year, because that puts us in a situation of retroactive laws, and that’s something that is very difficult to move forward with and explain to clients.

Amato: Thank you for that rundown to get an idea of the timeline. You mentioned earlier, manager amendments, but do you expect amendments to the tax portions of this bill?

Lauridsen: We are waiting on some amendments to see exactly what’s going to happen. We do know there were two provisions when it went from the budget committee to get looked at where it was controversial. One of them is Medicaid, which is not something that we follow through from our perspective, and then, of course, the other one has to do with the SALT, which is the state and local income tax.

The [SALT] cap is something that is definitely controversial at many different levels, and we’ll get into it a little bit further. We are expecting to see some amendments there. We’re not expecting it to be as favorable as we are hoping for and making a push for. Yes, we do expect there to be changes.

One thing to say is between this bill and what the Senate puts out, there’s going to have to be negotiations. The final law, not the bill that the House introduced or the bill from the Senate, the final law, which means they both approved it, I do expect that to be different, and I do expect to see changes. What they are, I don’t know right now.

Amato: Yeah. We’re early in a process. It seems like it’s been a long time, but really, there’s still a long way to go. An AICPA letter sent Tuesday to Congress urged changes in multiple tax provisions. Tell me more about some of the AICPA priorities.

Lauridsen: This bill is intended to be pro-growth, pro-business growth, and it’s supposed to help the economy. I would say there are definitely some provisions in there that are considered wins, but the big takeaway that I can’t stress enough is for our profession, for our members, and for clients who have passthrough entities, it is a net loss, the way that the bill is written, and it is not something that is pro-growth, particularly for our type of businesses and our firms, and our members and clients.

It is something that we are definitely pushing back on, and we’re getting very vocal about it, and we definitely have certain priorities. I would say the number one priority is the passthrough entity tax — state and local income tax deduction. We call that the PTET or the PTET SALT deduction.

Amato: So, an eight-letter, two-word acronym, PTET SALT deduction. Tell me a little bit more. Why does the AICPA believe that deduction should be preserved?

Lauridsen: You have to understand that passthrough entities prior to TCJA [Tax Cuts and Jobs Act], just like corporations, they were all allowed to take the SALT deductions, and it was unlimited, uncapped. And then of course, with TCJA, there was an individual cap that came at $10,000. Now, Congressman Kevin Brady actually came out and tweeted, and he said that the intention was never to limit the passthrough entities’ SALT deduction at that time.But in doing so, because the passthrough entities, the income and deductions and everything flows through to the individual, and the individual is capped at the $10,000, what ended up happening is a lot of states put in some legislation in order for that particular state to be able to take a SALT deduction for the passthrough entities, so it is state-dependent. This was actually blessed by the IRS, and that was actually the intention of Congress.

Now, what’s happened is with the proposal, it comes along, and it pretty much it gets tied into the Sec. 199A, and we can talk about that in a few minutes here, but it gets tied into Sec. 199A QBI, qualified business income deduction. The original theory is, if you qualify for the QBI deduction, then in theory, you have unlimited passthrough entity SALT deduction ability.

The problem is the way the bill was written, it has a specific exclusion for SSTBs, which are specified service trade or businesses, which is what we accountants are, but it’s also doctors, it’s veterinarians. It’s also pharmacists, athletes can be it. Pretty much an SSTB is where the service being offered is based on the skill of the individual offering that service. There are quite a bit of passthrough entities set up that way and are considered SSTBs.

So they no longer have the ability to take the SALT deduction, and to add insult to injury, the way it’s written, historically, there are some local taxes that you could always deduct. Think about the UBITs. Think about franchise taxes in various states. Again, this is very state-dependent, but you could always take those deductions regardless of what happened with TCJA. But now that’s excluded.

It puts the PTET SALT entities that have SALT in a worse position than immediately after when TCJA first came out and before the states were able to come forward with rules and legislation to be able to take that SALT deduction. It’s putting us in a worse situation. Like I said, it’s a net loss, the whole bill collectively, and it’s something that is very targeted against SSTBs.Quite frankly, it is unfair. It goes against a lot of our principles and the guiding principles of good tax policy. It goes against neutrality, it goes against fairness, it goes against simplicity, it goes against certainty, it goes against transparency. There’s a lot of reasons why this is just simply quite wrong.

Amato: A lot of acronyms. You’ve spelled those out well. Thank you for that. What else is a point of emphasis regarding this tax bill for you?

Lauridsen: There’s a couple of things. Like I said, the bill does have some wins for us within that bill. For example, you see the Form 1099-K [Payment Card and Third Party Network Transactions], which the threshold eventually is going to get to $600 in order to have the form and the requirement and the filing with it. Actually, the bill repeals that, and it takes it back to the old rules of the thresholds of $20,000 and 200 transactions. We see a win there.

With Sec. 529, where it allows things like the prepping for the CPA Exam and the taking of the CPA Exam, those fees to be able to be run through the 529 accounts. We also see other things like the Sec. 174 R&E expensing. We see the Sec. 163(j), the business interest deduction, all those things, like I said, are wins.

There is a win in there, too, for Sec. 199A, but that win is actually creating a lot of confusion because a lot of people think that the bill is an absolute win, but it’s not. The reason being is with Sec. 199A, the QBI, they increase the deduction amount from 20% to 23%. That is a win, but let’s be real, too. It’s 3% more of a deduction. We’re not talking enormous amounts of money here.

Furthermore, what they did with the bill is they relaxed the calculations where some high earners could potentially qualify and get a sliver of the QBI deduction. But the reality is in practice, you’re not going to see a lot of that really, truly happening. There might be a few handful of people out there that will benefit from that, but in practice, not really. Again, it’s not a huge win what they did, and this is where it’s a net loss.

They tied the PTET, the passthrough entity SALT deduction to Sec. 199A. A lot of people think that if you automatically qualify for the QBI deduction that you get the SALT deduction, and that’s just not the case for our types of businesses and entities.

Now, one other thing that I need to clarify, the way the bill is written for the SALT deduction, they talk about excluding any substitute payments.Meaning if you’re a passthrough entity and there’s a substitute payment, then you can’t take it. And because of the way that the states’ legislation is written, it essentially would make all passthrough entities not be able to qualify and take a SALT deduction. Now, that is an amendment we are actually expecting to see and come forward once we see the final House bill. What’s not being fixed is the targeting towards the SSTBs.

Amato: A lot to digest as of our recording, Wednesday, May 21, aiming to publish this episode, Thursday, May 22. Things could change just between that 24-hour period, but what else outside of examining this tax bill is on your advocacy radar?

Lauridsen: Well, Neil, that’s a good question. One of the big things that we do every single year immediately after filing season is we do a survey of our membership, and we ask them how was their interaction in the service they received from the IRS after filing season? What we’ve seen is from last year to this year, we flatlined. We’ve been consistent. The service that the IRS is providing has been consistent to last year.

But when you see the big picture, last year was an improvement from the prior year and, of course, an improvement from COVID. The big picture, we’re not to pre-COVID levels. The level of service we need to get to, there’s still a lot of room for improvement.

But the number one issue and concern that our members came forward with is the future of the IRS.With everything that we’ve seen going on with the administration and the workforce reductions for government agencies, IRS is one of those where people are concerned how things are going to move forward, and that is something we’re very closely monitoring.

Amato: That survey, you presented some of those results, high level at least, at [AICPA spring] Council last week. Melanie, as I said, a lot going on. We appreciate you taking the time to join us on the podcast. As a closing thought on May 21, what do you have for the audience?

Lauridsen: For the audience, like you said, there’s a lot going on. We have a lot of big items that we’re juggling with and looking and monitoring. I just want to reassure the membership that we are making the biggest push that we can. We have a call to action on the passthrough entity SALT deduction because it has a huge impact to our members and, of course, their clients, too.

Then with regards to the IRS, that is something we’re watching closely. As we start to see fractures within the service of the IRS, which we have started to see small fractures, that is something where we’re ready to step up and start having conversations about pretty much, quite frankly, getting the service that we deserve to get.

Amato: Melanie Lauridsen, thank you very much.

Lauridsen: Thank you, Neil.