Maximize Pharmacy State and Local Tax Deductions (SALT)
Tax planning advisor to pharmacies, Scotty Sykes, CPA, CFP explains how independent pharmacies are navigating state and local taxation through an IRS-approved strategy that is available in about 40 states.
With the Biden Administration’s Build Back Better plan, it remains to be seen how a revised SALT cap may help pharmacies in the future. Pharmacy advisors at Sykes & Company, P.A. are following this tax planning issue and will provide future updates. Contact us with any questions.
If you prefer to read this content, the video transcript is below.
Scotty: So, with the Tax Cuts and Jobs Act of 2017, they put a cap on the state and local taxes that you can deduct on your personal tax return Schedule A or your itemized deductions, and that cap was $10,000. And so, you know, pharmacy owners in high tax states, New York, Connecticut, California, really saw a major tax increase, really, from a federal perspective, because their deduction was limited to $10,000. And so, what a lot of these states have done, is they’ve allowed pharmacies to pay a state level tax at the pharmacy level, and these are for pass through entities, S corps, partnerships. And when you pay that, or you can elect to pay that tax at a state level through the pass through, which you’re getting a deduction there at the pharmacy for that tax paid, reducing your taxable income, federal, when it flows through to you personally. And so, you’re getting that benefit that way, but you’re also getting a credit for that tax paid on your personal return, even though it’s through the pharmacy pass through entity.
So, you know, the IRS somewhat blessed us this planning opportunity, just about, I don’t know how many it is now, but it’s close to 40 plus states have adopted some form of this state and local tax planning opportunity, if you will. And so, it’s certainly something on the table for those in the high income, high tax bracket areas, and those high tax states as well, to consider making the election or following through with your specific state to, again, pay tax at that state level, get the deduction at the pharmacy, and get the credit at the individual level. So, certainly a planning opportunity is out there for the tax year here.
Now, one thing I will add to that is, of course, you know, the Biden administration is currently looking at some pretty significant tax reform right now with the Build Back Better plan, so we’ll have to see what changes are in there. Remains to be seen how this all unfolds, at the end of the day, but be aware that, you know, this opportunity is out there, and you need to be prepared for it. Run the numbers, be able to act quickly, if you need to.