House Majority Leader K. Joseph Shekarchi has introduced what he calls “signature legislation” to help the many Rhode Island small business owners who will be hit by higher federal taxes under President Trump’s new tax laws.

The bill will provide a work-around for owners of “pass-through” entities whose state and local taxes exceed the new $10,000 cap on the state and local tax (SALT) deduction on their federal tax returns. The effort, which is based on a similar bill enacted in Connecticut in May, is carefully designed to be revenue-neutral for the state.

“This is a way to help Rhode Island small businesses at no cost to the state. Our small businesses are the backbone of our economy, and face enough challenges without being saddled with new tax burdens by President Trump’s tax plan. We’ve found a viable method to help their owners get credit for the taxes they already pay, so their businesses are not disrupted, forced to make cuts to their workforce or worse, to close,” Shekarchi (D-Dist. 23, Warwick) said in a statement. “My goal here is to prevent the Trump tax plan from hurting small businesses, so they can thrive here in Rhode Island.”

Since 1913, federal taxpayers have been allowed to deduct the full amount of their state and local taxes from their federal taxable income under the SALT deduction. However, the Tax Cuts and Jobs Act, pushed by President Trump and passed by Congress in December 2017, now limits the SALT deduction to $10,000 for tax years 2018 through 2025. This could add up to a significant increase in tax liability for many taxpayers across the nation and in Rhode Island. 

In Rhode Island, 33 percent of filers use that credit, and, on average, they claimed $12,434 in 2015, according to research by Pew Charitable Trusts. The organization lists Rhode Island as one of 19 states where the average SALT credit exceeds the new $10,000 cap.

The legislation allows pass-through entities, such as limited liability companies (LLCs), S corps, partnerships and sole proprietorships, to pay the federal tax on their own income, instead of passing it along to their partners to claim on their personal income tax returns, as is the usual practice. The bill also allows a credit the partners can take on their personal and corporate state income tax returns to ensure that the business’s income isn’t taxed twice. If passed, the changes would take effect for the 2019 tax year.

According to a release issued Wednesday, Shekarchi drafted the bill with the help Grafton “Cap” Willey IV, a Providence CPA, who approached Shekarchi with an idea brought to him by a fellow member of his Rotary Club and fellow CPA, Randy Dittmar of Warwick. 

“This bill will help small businesses, most of whom report their taxes as pass-through entities, by having the business entity pay the taxes on the business income and allowing a federal income tax deduction – which might have been limited if reported on the owner’s personal income tax returns,” said Willey. “Regular C-Corporations get this benefit, and this bill would put the pass-through entities on an equal footing with big businesses.”

Shekarchi introduced the bill in the House of Representatives Tuesday. Sen. Mark P. McKenney (D-Dist. 30, Warwick) is expected to introduce companion legislation in the Senate.