Larry's Tax Law

As reported on May 16, 2025, the SALT cap proposal contained in the legislation that was pending in the U.S. House of Representatives (“House”) aimed at, among other things, dealing with the expiring provisions of the Tax Cuts and Jobs Act (“TCJA”) was not well received by lawmakers from high-income tax states such as Oregon, New York, Hawaii and California.  That proposal increased the SALT cap from $10,000 to $30,000, but it contained a downward adjustment for taxpayers with “modified adjusted gross income” over $400,000.  For this purpose, modified adjusted gross income is adjusted gross income plus any amounts excluded from income under Code Sections 911, 931 and 933.  Under that proposal, the $30,000 cap is reduced by 20% of a taxpayer’s modified adjusted gross income to the extent it exceeds $400,000 ($200,000 in the case of a married taxpayer filing separately).  However, the SALT cap cannot be reduced below $10,000 ($5,000 in the case of a married taxpayer filing separately).

It appears the SALT cap proposal may have been the last item holding up the passage of the bill by members of the House.  After hours of debate and discussion, the proposal was modified, and the House passed the bill on May 22, 2025.  It now sits in the U.S. Senate (“Senate”), where it is expected this provision of the bill, among others, will face fierce debate.

Background

Prior to the Tax Cuts and Jobs Act (“TCJA”), there was no direct limitation on an individual taxpayer’s deduction of his or her state and local taxes (“SALT”) on the federal individual income tax return.  Of course, for high-income taxpayers, the SALT deduction often triggered the alternative minimum tax.

As of 2018, as a result of the TCJA, the SALT deduction for individuals was capped at $10,000 per year for both single and married taxpayers filing jointly ($5,000 for married taxpayers filing separately).  Hence, the cap contains an inherent “marriage penalty.” 

The SALT cap was added to the TCJA, in part, as a compromise for an increase in the standard deduction (almost doubling it from pre-TCJA days). It is, however, set to sunset at the end of this year.

This fourth installment of my multi-part series on Subchapter S is focused on suspended losses of an S corporation.  While the rules seem straightforward, their application can be tricky, especially given legislative changes made in recent years.

Background

In general, S corporation shareholders, like the owners of entities taxed as partnerships, are allocated their share of the entity’s losses for the taxable year.  A number of rules, however, may limit the ability of the owners to deduct these losses.

Last fall, the IRS announced, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through and are paid by the ultimate owners of the entity), the entity will not be subject to the $10,000 state and local taxes deductibility cap (the “SALT Cap”). 

On February 4, 2021, Senate Bill 727 (“SB 727”) was introduced in the Oregon Legislature.  SB 727 is Oregon’s response to the IRS announcement (see discussion below).

On June 17, 2021, after some amendments, SB 727 was passed by the Senate and referred to the House.  Nine days later, the House passed the legislation without changes.  On June 19, 2021, Oregon Governor Kate Brown signed SB 727 into law, effective September 25, 2021.  In general, it applies to tax years beginning on or after January 1, 2022.  Interestingly, SB 727 sunsets at the end of 2023.

In relevant part, SB 727 allows pass-through entities to make an annual election to pay Oregon state and local taxes at the entity level.  For pass-through entities that make the election, their owners will potentially be able to deduct more than $10,000 of Oregon state and local taxes on the federal income tax return.  However, it gets even better—SB 727 includes a refundable credit feature that may result in further tax savings for some owners of pass-through entities.

The Oregon Society of Certified Public Accountants (OSCPA) will be hosting its 2021 Annual Real Estate Conference as a live webcast on Wednesday, June 9, 2021. I’ve been a frequent speaker at the OSCPA’s conferences over the past 30+ years. This year, I am looking forward to present on “Section 1031 Exchanges: A Look At Recent Developments and Other Tax Deferral Alternatives.”

It is not unreasonable to anticipate that there will be a federal tax policy transformation following a change in the political control of the White House, the U.S. Senate and the U.S. House of Representatives.  What may be unreasonable, however, is making knee-jerk tax planning decisions in anticipation of possible modifications to the Internal Revenue Code (the "Code").  Reactionary planning, unless it is well thought out and is based upon sound business judgment, could end up being disastrous.  During the present times, tax advisors and their clients need to be cautious in their tax planning and any related decision-making.   

Looking through a lens solely focused on federal taxation, it seems that commentators, tax advisors and taxpayers alike are all worried about the future.  Possible tax policy changes on the horizon that are being bantered about include:

Like other commentators, we have been writing extensively about the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the historic $2.2 trillion relief package enacted last month by lawmakers in the wake of the COVID-19 pandemic.

In a prior post, we provided a summary and analysis of numerous tax provisions of the CARES Act. 

In this post, we expand on our previous coverage of the CARES Act relative to net operating losses (“NOLs”), and provide an overview of new guidance issued by the IRS.

I apologize in advance for focusing my blog these past several weeks on the new Oregon Corporate Activity Tax (“CAT”), but my mind keeps finding new facets to this tax regime that I suspect most tax practitioners and even the lawmakers who passed the legislation may not have envisioned or anticipated.  So, please indulge me as I explore another one of these numerous issues in this installment of the blog.

After the passage of the Tax Reform Act of 1986 and the introduction of Code Section 469, we started seeing tax practitioners focusing attention on trying to figure out how their clients could be characterized as active participants in a trade or business activity.  Their goal is simple – they want to avoid the deduction limitations imposed by the passive activity loss rules contained in Code Section 469. 

As with any investment, due diligence is required. Investing in an Opportunity Zone Fund (“OZF”) is not any different.

Historically, we have seen taxpayers go to great lengths to attain tax deferral. In some instances, the efforts have resulted in significant losses. With proper due diligence, many of these losses could have been prevented.

A TALE OF IRC § 1031 EXCHANGES GONE WRONG

Tax deferral efforts under IRC § 1031 have often resulted in significant losses for unwary taxpayers.   The best examples of these losses resulted from the mass Qualified Intermediary failures we saw over the last two decades.

BACKGROUND

Sections 1400Z-1 and 1400Z-2 were added to the Internal Revenue Code of 1986, as amended (the “Code”) by the Tax Cuts and Jobs Act. These new provisions to the Code introduce a multitude of new terms, complexities and traps for the unwary.

The first new term we need to add to our already robust tax vocabulary is the phrase “Qualified Opportunity Zones” (“QOZs”). The Code generally defines QOZs as real property located in low-income communities within the US and possessions of the US. Additionally, to qualify as a QOZ, the property must be nominated by the states or possessions where the property is located and be approved by the Secretary of Treasury.