SEA 2 and SEA 419 – Legislative Summaries – Potentially Reduce Tax Liability for Businesses

SEA 2: Leveling the playing field for the federal SALT deduction

SEA 2 provides new tax relief to Hoosier businesses, including many small businesses, while being revenue-neutral to the state government. It achieves these goals by changing state law to maximize a federal income tax deduction for "pass-through" entities (like LLCs and S-Corps) – specifically the State and Local Tax (SALT) deduction. A conservative estimate of the potential federal tax savings for Hoosier businesses is $50 million per year.

Under current federal law, businesses that pay corporate tax (e.g. C-Corps) are allowed to deduct the entire amount of their state and local tax payments from their federal tax liability without any limitation. However, pass-through entities, which tend to be smaller businesses, are limited to a SALT deduction of no more than $10,000. Indiana's SEA 2 allows many pass-through entities to elect to pay Indiana state income tax at the entity level instead of at the individual level. This change means that when these pass-through entities pay their federal taxes, they will receive the unlimited SALT deduction instead of being capped at $10,000.

The ability to pay state income tax at the entity level rather than as individuals is optional and is retroactive to January 1, 2022. For businesses interested in pursuing this option, it is recommended that the owners or partners consult a tax professional to determine the right action for their situation.

For more information from the Indiana Department of Revenue regarding the changes in SEA 2, including an FAQ page, please visit https://www.in.gov/dor/tax-forms/ptet/.

SEA 419: Expensing of business R&D investments

One provision of SEA 419 allows Hoosier businesses to fully and immediately expense all research and development (R&D) investments in the current taxable year as opposed to over a five-year period. Under current federal law, businesses must spread any domestic R&D expenditures over a five-year period for purposes of claiming a deduction. The federal policy in essence requires businesses to overstate their earnings, which increases their federal and state tax liability.

By allowing full expensing of R&D investments in the current taxable year for state tax purposes, businesses will be able to lower their taxable income in the year in which the expenses are actually incurred and invest more capital back into operations and further R&D. This change is retroactive to January 1, 2022.

 

 

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