Everyone likes a tax cut, and the Federal Tax Cuts and Jobs Act of 2017 included many.

But unfortunately, it also put a $10,000 cap on the amount individuals could deduct on their tax returns for sales and local taxes (SALT), a limitation that significantly affected the residents of states with high local taxes the most. Such as New Jersey. In response, legislators there passed legislation back in 2018 that tried to make property tax payments deductible as charitable contributions. That move was subsequently prevented by the IRS.

But now Gov. Phil Murphy is at it again. Two weeks ago, he signed new legislation that lawmakers hope will provide a work-around for small-business owners in the state, many of whom are the most impacted by the federal SALT limitation.

The law, which will take effect for the 2020 tax year, will allow “pass through” businesses, such as S-corporations and partnerships, to deduct local income tax paid on behalf of its owners on their company’s tax returns. That way, the state still collects its money and the owners who lost the federal deduction at the individual level can still take advantage of the deduction at the corporate level.

So is this just a gimmick that can be contested in the courts? Or is it a bona fide way for New Jersey business owners to get back -- for some – a very lucrative deduction?

Alan Sobel, a certified public accountant based in Livingston, N.J., leans toward bona fide. Sobel is the president-elect of the New Jersey Society of CPAs and helped write the act, which the society estimates will save New Jersey business owner $200 million to $400 million annually on their federal taxes. He said he believes that the new legislation has “three pillars” that support its deductibility.

The U.S. Constitution has historically supported a state’s right to tax its residents and businesses that operate in the state in the manner of its choosing and that the legislation is sound because the Internal Revenue Code provides for any business to deduct “ordinary and necessary business expenses such as rent and state taxes, which have historically been deducted by non-pass-through corporations.” Finally, Sobel says that the language in the 2017 federal legislation “only excludes, as deductible, state and local income tax in the cases of an individual.”

So, yes, many experts such as Sobel believe that the legislation could work. And if it does, it could be a big relief to many small-business owners in New Jersey. “IRS data shows that in 2014, 41 percent of New Jersey taxpayers claimed an average SALT deduction of $17,183.33” says James B. Evans Jr., a lawyer with Kulzer & DiPadova in Haddonfield. “Some tax experts believe it is too late for the IRS to deny the pass-through work-around.”

But business owners should be careful. Individual situations may vary. And there's still a concern as to how other states will treat the deductibility of the tax if one of the business owners of a pass-through company lives out of state.

“When a portion of that income is subject to tax in another state, the home state generally allows a tax credit for the tax paid to the other state [subject to certain limitations],” says Tom Corrie, a tax lawyer who practices in New Jersey with New York-based accounting firm Friedman. “But will the home state allow a tax credit regarding tax paid at the entity level? The New Jersey legislation provides for a credit in such situations, but in many states it is an open question.”

New Jersey’s new legislation will be closely watched by other states with higher local taxes, such as California and New York. If the work-around is effective, residents in those states may see similar changes to their own tax laws.

Regardless, if you’re running a pass-through business in New Jersey, you should be talking about the new legislation with your accountant. Yes, it may be an advantage. But in these politically charged times, I wouldn’t assume that you’re in the clear yet. “There is a risk the IRS could challenge this as a deductible business expense,” Sobel warns. “Every business owner along with their tax advisers will have to weigh risk and potential cost.”

Gene Marks is president of the Marks Group, a small-business consulting firm based in Bala Cynwyd.