PTE Tax and SALT Cap Changes: Potential Impacts on Passthrough Entities

                                       

By: Cara Pellicano

Senior Manager, Tax

When the Tax Cuts and Jobs Act (TCJA) of 2017 capped the State and Local Tax (SALT) deduction at $10,000, it sent ripple effects through the tax landscape, particularly for taxpayers in high-tax states. In response, many states created Passthrough Entity (PTE) tax workarounds to preserve some federal deductibility for their residents.

Now, with discussions in Washington about raising, repealing, or extending the SALT cap, it’s worth exploring how such changes might influence the effectiveness and future of PTE tax regimes.

What Is the SALT Cap?

Under pre-2018 tax law, taxpayers who itemized could deduct all their state and local taxes—income, property, and sales taxes—on their federal return. The TCJA changed that, limiting the deduction to $10,000 per year.

This cap hits hardest in high-income, high-tax states like California, New York, New Jersey, and Connecticut. Taxpayers in these areas saw their federal deductions shrink, effectively increasing their federal tax liabilities.

What Are PTE Taxes?

In response, many affected states enacted PTE tax regimes. Here’s how they work:

Passthrough entities (partnerships, S corporations, and LLCs) can elect to pay state income tax at the entity level.

This tax is fully deductible at the federal level as a business expense, sidestepping the SALT cap for individuals.

The entity’s owners then receive a state credit or deduction to prevent double taxation on the same income.

It’s a win-win under current rules: the state collects the same revenue, but the taxpayer gets a larger federal deduction.

How Would Changing the SALT Cap Affect PTE Taxes?

1. If the SALT Cap Is Repealed or Raised

• Reduced Utility: If individuals can once again deduct most or all of their SALT, the benefit of electing into a PTE regime diminishes.
• Lower Participation: Business owners may opt out of the PTE election, especially in cases where filing is complex or the benefits are marginal.
• State Policy Reassessment: States may revise or phase out their PTE tax frameworks if they no longer provide a federal benefit.

2. If the SALT Cap Is Extended or Made Permanent

• PTE Taxes Stay Valuable: In this case, PTE taxes remain one of the most effective workarounds to reduce federal tax for high-income individuals.
• Broader Adoption: States that haven’t yet implemented a PTE tax (or only offer limited versions) may be incentivized to adopt or expand such regimes.
• Increased Compliance Importance: CPAs and tax advisors will continue to play a crucial role in helping clients navigate these elections.

Practical Implications for Taxpayers and Advisors

Planning is Key: Business owners should coordinate closely with tax professionals each year to determine whether electing into their state’s PTE tax is still advantageous.

Monitor Federal Developments: Any change in SALT cap policy will directly impact the federal tax benefit tied to PTE elections.

Be Mindful of Each State’s Rules: PTE tax structures vary widely—some states allow full credits, others partial, and filing deadlines differ.

PTE Tax Strategies Amid SALT Cap Uncertainty

As Congress continues to debate the future of the SALT deduction cap, Passthrough Entity taxes remain a critical planning tool for affected taxpayers. Whether they remain a long-term or temporary solution depends mainly on how federal tax policy evolves.

Taxpayers and advisors alike should stay informed and agile, ready to adjust strategies in response to new legislation. In the meantime, the PTE tax continues to serve as a savvy workaround for those looking to navigate the limitations of the SALT cap.

Stay ahead of tax changes—consult with our advisors today to leverage PTE Tax strategies and maximize your savings.

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