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The potential fallout from new tax regulations
As negotiations around President Donald Trump’s proposed tax reforms heat up, a hidden provision could spell disaster for businesses in high-tax states like New York. This provision threatens to dismantle state laws that have provided crucial tax relief to partnerships, particularly after the 2017 tax reform limited the State and Local Tax (SALT) deduction to just $10,000.
For many businesses that operate under personal tax codes rather than corporate ones, this change could lead to significant financial burdens.
Understanding the implications of the Pass-Through Entity Tax
In response to the 2017 tax reforms, which disproportionately affected partnerships, approximately 40 states, including New York, enacted complex rules to mitigate the impact.
New York’s Pass-Through Entity Tax (PTET) was designed to shield these businesses from the harshest consequences of the federal tax changes. However, if Congress decides to eliminate the PTET, New York businesses could face an additional $5 billion to $6 billion in federal taxes, according to estimates from the Empire Center’s E.J.
McMahon.
The ripple effect on New York City partnerships
Partnerships based in New York City could be particularly vulnerable if the new federal rules also remove the deduction for the city’s 4% unincorporated business tax. This could result in a staggering 50% increase in tax bills for many companies, prompting some to consider relocating to states with lower tax rates, such as Florida or Tennessee.
The irony is that while these reforms aim to replace lost federal revenue by raising the SALT limit, they do little to alleviate the tax burden on business filers.
Addressing the root of the problem
The underlying issue remains the exorbitant tax rates imposed by state governments in places like Albany, Trenton, and Sacramento.
Until these states recognize the need for reform, both individual and business taxpayers will continue to bear the brunt of these high rates. As partnerships begin to grasp the potential consequences of these new federal rules, they are voicing their concerns to congressional representatives, signaling that the stakes are higher than ever.
What’s next for businesses?
As the drama unfolds in Washington, businesses in high-tax states must stay informed and prepared for potential changes. The outcome of these negotiations could reshape the tax landscape, impacting not just the bottom line of companies but also the broader economy in regions heavily reliant on these businesses. With the stakes so high, it’s crucial for business owners and stakeholders to advocate for their interests and push for solutions that promote economic growth rather than stifle it.
