The SALT Cap Workaround That Saved One Business Owner $48,000
Case Study Summary
When the Tax Cuts and Jobs Act capped the state and local tax deduction at $10,000, many high-income earners in states like California, New York, and New Jersey felt the pain immediately. But for business owners structured as pass-through entities, a provision in many state tax codes offered a meaningful workaround.
The SALT Cap Problem
The $10,000 cap on state and local tax (SALT) deductions hit high-income earners in high-tax states particularly hard. Someone paying $80,000 in California state income tax could only deduct $10,000 on their federal return — losing the benefit of $70,000 in additional deductions.
How the PTET Election Works
Pass-through entity tax (PTET) elections allow eligible businesses — including S-corporations and partnerships — to pay state income taxes at the entity level rather than the individual level. Because the $10,000 SALT cap applies to individuals, not businesses, this entity-level payment is typically fully deductible as a business expense on the federal return.
State-by-State Availability
Most states that impose an individual income tax have now enacted some form of PTET legislation. The specifics — including which entity types qualify, how credits flow to owners, and how the election is made — vary by state. Careful coordination between state and federal returns is essential to capturing the full benefit.
Who This Strategy Is Best For
- ✓S-corporation and partnership owners in high-tax states
- ✓Business owners paying significant state income taxes
- ✓Residents of California, New York, New Jersey, or other high-tax states
- ✓Pass-through entity owners looking to maximize federal deductions
- ✓Anyone impacted by the $10,000 SALT deduction cap
Explore Your Strategy
Speak directly with Rajiv Rebello to see how this strategy fits into your comprehensive tax plan.