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| Santa Clara County Law Library - great place and free - has the 1944 Cumulative Bulletin! |
This is a reminder of a few things. First, not everything is on the Internet. While there might be a copy of the 1944 legislation available on an online database somewhere, likely not for free access (I could not find it). But the CB is really needed because footnote 168 refers to a specific page for its support of a statement about the present law (pre-TCJA law). I pulled the CB from where the Santa County Law Library (free to public) stores its old government publications (in the attic!) (Note: the photo above shows first and second floors, there really is an attic above that.)
But - now that page from the CB is on the Internet - click on Section 164 from this 1/2/18 post where I have links to a few track changes versions of Code sections changed by the TCJA. The Section 164 link will also take you to the committee report.
Second, the 1944 law is a reminder that when Congress created the concept of Adjusted Gross Income (AGI) in 1944, they described where state and local taxes are deducted (for or from AGI). For property taxes paid by your sole proprietor business for example, they are deducted for AGI because they are paid and imposed directly on the business. In contrast, state income taxes imposed on that business are deducted from AGI as they are remotely connected to the business income. Basically, I think the concept is that when an individual calculates their state income taxes that calculation involves all of their income, various deductions, exclusions and credits. How much of that state income tax is attributable to the business income?
This is why for decades, state income taxes go on Schedule A rather than splitting it among other schedules, such as C, E, and F. In contrast, property taxes paid by a business, partnership or farm are deducted above the line (as part of one of these schedules).
This was also an issue after the Tax Reform Act of 1986 when tax prep fees became subject to the 2%-of-AGI threshold. People asked - what about the tax prep fee attributable to my Schedule C sole proprietor business? Despite the treatment of state and local income taxes, the IRS determined that the tax prep fee could be allocated (see Rev. Rul. 92-29).
Also, old IRS rulings determined that in calculating a net operating loss (NOL), the state and local income taxes attributable to business income can be part of that NOL (Rev. Rul. 70-40). Thus, there are ways to measure that (there are ways to measure most things).
The $10,000 state and local income cap (also referred to as the SALT cap), is in the law from 2018 through 2025. The House Ways and Means Committee voted to make it permanent, along with other temporary individual provisions including the reduced tax rates), on 9/13/18 (HR 6760). It is unlikely the Senate will vote on this as it would take 60 votes there to pass.
Final point while I'm talking about the $10,000 SALT cap, why not change the law to allow individuals to deduct their state and local income taxes attributable to their business income above the line? Certainly with the $10,000 cap, this seems like the right thing to do. After all, corporations don't have a cap on their state and local income tax deduction, why should individuals operating a business outside of the corporate form have a limitation. And even without the cap, deducting for AGI makes sense because not all business owners itemized. The AICPA recommended this change while the TCJA was being discussed in Congress (which was the first time the SALT cap came up) (see item 4 in this 11/2/17 letter to Congress and this 11/13/17 letter and 11/10/17 letter).
What do you think?
source http://21stcenturytaxation.blogspot.com/2018/09/tcja-reference-to-1944-law-regarding.html
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