Now that the Republicans’ new tax bill is the law of the land today, January 1, 2018, the storm clouds over it are already gathering, particularly related to SALT (state and local taxes inclusive of property taxes), all capped at $10,000.00 ("Democrats in High-Tax States Plot to Blunt Impact of New Tax Law"). Some of the ways suggested by those in control of “blue” states most affected like California, New York, New Jersey, even Illinois, Maryland, Oregon and the like, include a constitutional challenge that by capping these taxes, individual tax filers in those states will be taxed on already paid taxes; that the scheme Republicans have established with their cap is unconstitutional; and that individual states should revise their state tax laws to assuage the impact of the cap. Add to this mix the IRS Advisory of December 27, 2017 that told tax filers before they could deduct on their 2017 federal income tax returns any pre-payments for property taxes due in 2018 there must (1) exist an assessment of their property made in 2017 and (2) a determination of the tax liability for that assessment that is paid in 2017 ("IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017"; "If you prepaid property taxes, will you get the deduction? If not, can you get your money back?"; "IRS warns taxpayers that prepaying property taxes might not work"). Of course, some state and local taxes are assessed and known in 2017, others not until 2018; some local taxing bodies tax real estate in arrears; and still others make an assessment (= taxable value of land and structure on that land as determined by the taxing body) in the current year, but will not make a determination of the amount of liability for that assessment until a few months into the following year. Lake County, Illinois, just north of Chicago and Cook County, is an example of the latter, but does that mean, for example, a determination of liability made in 2018 linked to an assessment in 2017 is provided cover by the IRS Advisory’s mandate of an assessment and payment both made in 2017?
And, what now happens with tax filers that have now already pre-paid $millions in property taxes in 2017 estimated to be due in 2018 to avoid the new cap, yet there no doubt are tax filers that have withheld pre-paying based on the IRS Advisory because they did not know in 2017 precisely what their property tax liability will be for 2018?
Adding to the confusion is that at the last minute, the Republicans inserted a provision that state income taxes, again part of SALT as are property taxes, cannot be pre-paid in order to escape the mandate on capping state and local taxes.
So now what? The answer may well be found in a case decided a few years back by the Supreme Court.
There are various descriptions of tax filers, but let’s use two of the most common: individuals and corporations/businesses. In simplest terms, real estate or property taxes on real estate on the assessed value of that real estate and owned by one’s business is a deductible business tax ("What Business Tax Costs Can Be Deducted?"). To repeat, but the new tax law places a cap for individuals of $10,000 for state and local taxes inclusive of property taxes.
Is there a legal distinction between a corporation and an individual in order to justify why the former is allowed to deduct all of its property taxes as a business expense and the latter faces a cap of $10,000? After all, the purpose of taxing real estate by a taxing body is the same---to collect revenue to benefit the various taxing bodies that rely on these funds for their respective operations.
To answer the query just posed, one only need to look to a 2014 high court ruling involving Hobby Lobby, a chain of craft stores, that brought suit claiming it should not be forced to pay for contraceptive insurance coverage provided through the Affordable Care Act (”Obamacare”) because such coverage violates the owners’ religious beliefs. The opinion held that corporations are people; even the U.S. Code defines corporations as people in its very first sentence ("What the Hobby Lobby Ruling Means for America"; "Yes, Corporations Are People").
So if a corporate or business entity has been construed by our nation’s highest court as a person, why should that “person” be treated any differently than persons that are individual tax filers when it comes to deducting state and local taxes? Sure, Congress creates laws and can do as it pleases, provided that its laws have equal application under the Constitution because there exists a rational basis to treat certain affected classes differently. Only a court can determine this, but it would be a real stretch to say there exists a rational basis for corporations or businesses to deduct their real estate taxes, even SALT, without limit yet not for individual citizens, particularly those most affected that reside in high-taxed states, glaringly more blue than red. This would be a political distinction, not one that deserves unequal application of the very same (SALT) deduction applied to similarly situated tax filers---again, our supreme court tells us a business entity is a person.
Because the tax law was born of unusual haste, clear bias, and poorly drafted, a sound basis exists to legally contest its application, as here---even recognizing the pitfalls and the uphill climb ahead in doing so.