Category: SALT cap workaround

SALT Cap Workaround Update: Why PTET Elections Still Matter After OBBBA

August 29, 2025 | By: Robert A. Green, CPA | Read it on

The $40,000 SALT cap phases out for high earners. Learn why PTET elections remain vital—preserving deductions, lowering AGI, and reducing AMT income.

In my earlier blog posts — Senate Tax Bill Preserves SALT Workaround for Traders and SSTBs and OBBBA Trader Tax Update: 2025 Law Secures Key Provisions for Traders — I explained how Congress ultimately preserved the pass-through entity tax (PTET) SALT cap workaround and temporarily raised the SALT cap from $10,000 to $40,000 for 2025, with indexing through 2029. That legislative victory answered months of uncertainty: the SALT cap increase and PTET deductibility passed both chambers intact, and President Trump signed the bill before the July 4 recess.

How the SALT Cap Workaround Works

The SALT cap limits itemized deductions for state and local taxes on individual returns. It includes state and local property taxes, as well as either state and local income taxes or state and local sales taxes (but not both in the same year).To bypass this, many states created pass-through entity tax (PTET) elections. With PTET, state income taxes are paid at the entity level. PTET entities include general and limited partnerships, multi-member LLCs filing as partnerships, single-member LLCs electing S-Corp status, and S-Corps. Sole proprietors filing a Schedule C and single-member LLCs taxed as disregarded entities are not eligible for the PTET workaround.

PTET payments are treated as a business expense, fully deductible on the federal return, and then credited to the owner’s state tax return. This shifts the deduction from the limited individual level to the unlimited business level, preserving a tax benefit that might otherwise be lost. The pass-through entity must operate a business, which includes traders eligible for Trader Tax Status (TTS). Most taxpayers also have other types of income, including wages, fees, and portfolio income. State taxes paid on that non-business income must remain on the individual tax return and are applied towards the SALT cap.

Each state’s PTET regime may still have quirks or limitations—so entity owners should review both state and federal impacts. For example, some states disallow PTET for certain types of business entities (e.g., passive investment partnerships). Be aware of the mechanics and timing of PTET elections (e.g., the fact that some states require annual or even quarterly elections, with specific deadlines).

Phaseout of the Higher SALT Cap

OBBBA’s $40,000 SALT cap is not equally available to all taxpayers. For married filing jointly and single taxpayers with modified adjusted gross income (MAGI) over $500,000 (or $250,000 for married filing separately), the benefit begins to phase out:

Formula: Phaseout = 30% × (MAGI – $500,000)
Example: A couple filing jointly with $600,000 of MAGI would see a reduction of 30% × $100,000 = $30,000. Their SALT deduction falls from $40,000 to the minimum $10,000. Both the cap and the MAGI threshold are indexed by 1% annually (so for 2026, the threshold is $505,000, and so on).

That means high-income taxpayers — especially those above $600,000 MAGI — effectively revert to the old $10,000 cap. For them, the PTET election is often the only way to preserve a substantial SALT deduction at the federal level.

PTET Benefits Beyond the SALT Cap

Impact on Self-Employment Tax (Partnerships)
For operating partnerships engaged in an active trade or business (e.g., law firms, professional practices, and consulting firms), PTET deductions reduce the net income before it is passed through to the partners. This lowers self-employment (SE) income and reduces SE tax liability — a benefit the individual SALT cap doesn’t provide.

Partnerships eligible for Trader Tax Status (TTS) are different. Trading gains are considered unearned income; therefore, TTS partnerships do not generate SE income from trading profits and don’t pay SE tax.

In addition to PTET business deductions, which lead to lower federal income taxes on the individual return, PTET has other benefits tied to lower:

Adjusted gross income (AGI) and modified AGI (MAGI)
Taxable income.

Lower AGI, or MAGI, can unlock or expand deductions and credits that phase out at higher income levels — for example:

Passive loss allowance.
IRA/Roth IRA contribution eligibility.
Child tax credits.
Medical expense deduction (7.5% AGI floor).
Charitable contribution percentage limitations.
Qualified Business Income (QBI) deduction limitations for both SSTBs and non-SSTBs. The 20% QBI deduction is now permanent under OBBBA, with revised phaseout ranges. For 2025, income thresholds are $394,600 (married filing jointly) and $197,300 (single), indexed for inflation. There is also a non-indexed phasein/phaseout range of $100,000 (married) and $50,000 (single), subject to wages and property limitations. Beginning in 2026 under OBBBA, the income threshold will continue to be indexed for inflation. Additionally, OBBBA increases the 2026 phasein/phaseout range to $150,000 (married) and $75,000 (single), which will be indexed for inflation.

In short:

Partnerships with Trader Tax Status (TTS) → PTET lowers AGI and taxable income, improving eligibility for deductions, credits, and QBI. A TTS LLC taxed as a partnership can deliver PTET benefits based on a higher income unencumbered by health insurance and retirement plan deductions. (TTS partnerships cannot pay guaranteed payments to owners, which would be SE income or earned income, and TTS sole proprietors cannot pay wages to the owners; for those, employee benefits are required through an S-Corp.)

In California, LLCs/partnerships owe an annual minimum tax of $800 (plus a gross receipts fee at higher levels), which is still lower than the 1.5% S-Corp franchise tax rate. A few other states may have entity/franchise tax structures that affect PTET planning, but these are generally less costly than those in California. Most states have nominal entity-related taxes.

S-Corps with TTS → PTET integrates with officer compensation, retirement planning, health insurance deductions, and QBI strategies. Health insurance premiums and retirement plan deductions require earned income, which is officer wages for an S-Corp. The S-Corp underlying income is unearned, so a TTS S-Corp does not need to pay the owner “reasonable compensation.” Instead, they can choose the salary amount based on their target deductions for health insurance premiums and retirement plan contributions.

S-Corps face higher franchise taxes in California (1.5% of net income) compared to LLCs/partnerships. Still, those higher costs can often be offset by the added ability to deduct health insurance and maximize retirement plan contributions.

PTET and the Standard Deduction

Even when taxpayers can deduct all of their state and local taxes due to the increased $40,000 SALT cap for 2025, there are still reasons to consider making the PTET election. If deducting those taxes at the partnership or S-Corp level causes the individual’s remaining itemized deductions to fall below the standard deduction, PTET can increase the taxpayer’s total deductions by allowing the use of the full standard deduction ($31,500 for married filing jointly, $15,750 for single and MFS in 2025). Beginning in 2026, individuals who do not itemize will also be allowed a $1,000 ($2,000 if MFJ) above-the-line deduction for most charitable contributions in cash. PTET can help taxpayers take advantage of both the standard deduction and this above-the-line charitable deduction. Another key point: SALT itemized deductions are not deductible for alternative minimum tax (AMT) purposes, whereas PTET deductions reduce AMT income as well.

PTET Advantages at a Glance

Fully deductible at the pass-through entity level for federal purposes, even when the SALT cap limits individual deductions.
Preserves state tax deductibility for high-income taxpayers, phased out of the $40,000 SALT cap.
Reduces SE tax for operating partnerships.
Lowers AGI, MAGI, and taxable income, improving eligibility for credits and deductions, including QBI.
Helps taxpayers qualify for the standard deduction and, beginning in 2026, the new above-the-line charitable deduction.
Deductible for AMT purposes, unlike SALT itemized deductions.
Offers planning flexibility for S-Corps to integrate officer compensation, retirement, and health insurance strategies.

For guidance on whether PTET elections are suitable in your situation, consult your tax advisor. Contact us at GreenTraderTax for professional assistance from Green, Neuschwander & Manning, LLC.

Executive Summary

Congress raised the SALT cap to $40,000 for 2025, but high earners will see it phased out to $10,000. PTET remains essential because it moves state taxes to the pass-through entity level, where they are fully deductible for federal purposes and also reduce AMT income. In effect, PTET shifts the deduction from the limited individual level to the unlimited business level. With OBBBA making the SALT cap workaround permanent, taxpayers have renewed reason to consider entity formation. PTET can also help unlock the standard deduction and, beginning in 2026, the new above-the-line charitable deduction. For guidance, consult your tax advisor or contact us at GreenTraderTax for professional assistance.

Star Johnson, CPA, contributed to this blog post.

Final Tax Reform Bill Preserves SALT and PTET Deductions for Traders and Professionals

July 3, 2025 | By: Robert A. Green, CPA | Read it on

Traders and professionals win as Congress drops PTET restrictions and expands the SALT cap in final tax deal.

After weeks of deliberation, revisions, and intense advocacy, the Senate and House have passed the final version of the One Big Beautiful Bill Act (OBBBA, H.R. 1), sending it to President Trump for signature on Independence Day. The final legislation maintains critical tax benefits for traders and other professionals by preserving access to state and local tax (SALT) deductions and the pass-through entity tax (PTET) workaround. (July 4th update: the president signed it.)

How the SALT Cap Debate Evolved

The original Tax Cuts and Jobs Act (TCJA) capped the SALT itemized deduction at $10,000 per year, causing tax increases for many professionals in high-tax states. In response, 37 states adopted PTET regimes allowing pass-through businesses—like LLCs, partnerships, and S-Corps—to deduct SALT at the entity level and bypass the cap. This workaround became vital for service businesses and traders who qualified for trader tax status (TTS).

The House version of H.R. 1 proposed increasing the SALT cap to $40,000 in 2025 with phaseouts based on income, but controversially denied PTET deductions to specified service trades or businesses (SSTBs)—including accountants, lawyers, doctors, and traders. The original Senate draft mirrored some of these restrictions, proposing a 50% cap on the PTET deduction.

The Senate Heard Our Voices

Thanks to strong feedback from CPAs, industry leaders, and affected taxpayers—including traders—Senate Republicans revised their position. On July 1, the Senate passed a new version of the bill that:

Increases the SALT cap to $40,000 in 2025, with 1% annual inflation indexing through 2029. The cap reverts to $10,000 in 2030.
Preserves full PTET deductibility for all pass-through businesses, removing earlier proposals that would have limited this benefit or excluded SSTBs.
Implements a phaseout of the SALT cap benefit for modified AGI above $500,000, adjusted upward annually.

This revised Senate bill retained the SALT workaround while avoiding discrimination against SSTBs, and it passed the Senate on July 1.

Final Passage by the House

On July 3, the House approved the Senate’s version without any amendments, ensuring that the bill would proceed directly to the President’s desk in time for the July 4 deadline. This legislative alignment locked in the Senate’s more favorable approach to SALT and PTET deductions.

Why This Matters to Traders and Professionals

The final legislation avoids the unfair treatment proposed in earlier versions and maintains parity between pass-throughs and C corporations. Traders with TTS who operate via PTET-eligible entities can continue to deduct state taxes at the entity level, significantly lowering their federal tax liabilities.

The AICPA welcomed this outcome, with President and CEO Mark Koziel emphasizing that removing PTET limits was vital for fairness and simplicity in the tax code. The final result ensures continuity for millions of small businesses and traders.

Final Thoughts

This legislative victory was hard-won and shows the power of informed advocacy. By preserving the SALT cap workaround and maintaining access to PTET deductions for all professions, the final tax reform bill supports a fairer and more competitive environment for traders and service businesses.

Senate Tax Bill Preserves SALT Workaround for Traders and SSTBs

| By: Robert A. Green, CPA | Read it on

Update July 3: Final Tax Reform Bill Preserves SALT and PTET Deductions for All Pass-Throughs

House and Senate agree on a $40,000 SALT cap for 2025 and maintain full PTET deduction access.

In a fast-track move to finalize tax reform before the July 4 recess, the House on July 3 passed the Senate’s July 1 version of the One Big Beautiful Bill (OBBBA/H.R. 1) without any further amendments, sending the legislation directly to the President’s desk for signature.

The Senate’s final version included substantial improvements to SALT and PTET provisions compared to earlier drafts and the House bill.

Final SALT and PTET Provisions Now in the Bill:

SALT Cap: Set at $40,000 for 2025, with 1% inflation indexing through 2029, before reverting to $10,000 in 2030. (See additional July 3 details below.)
PTET Deduction: All limitations removed. The bill preserves full access to the PTET SALT deduction for all pass-through entities, with no carveouts for SSTBs, ensuring parity with C corporations and reducing complexity. The SALT cap workaround survived intact.

Good news for traders and other professionals: In order to meet the July 4 deadline, the House accepted all of the Senate’s changes without alteration. As a result, these SALT and PTET provisions—favorable to pass-throughs and SSTBs—are now part of the final legislation, pending the President’s expected signature on July 4.

Update July 1: Senate Final Tax Bill Brings Good News for Traders
Crucially, the Senate removed the 50% limitation on the PTET deduction, preserving TCJA’s current law treatment and avoiding SSTB exclusions.

The American Institute of CPAs (AICPA) has expressed strong support for the changes made in the Senate’s final version of the “One Big Beautiful Bill Act,” particularly revisions to the state and local tax (SALT) provisions. The House-passed version of the bill would have increased the SALT cap to $40,000 but phased it out at high income levels—and controversially denied the SALT PTET (pass-through entity tax) deduction to specified service trades or businesses (SSTBs), including traders eligible for trader tax status, accountants, attorneys, and doctors. These professionals would have been subject to the SALT cap at the individual level and denied the pass-through SALT cap workaround that many businesses in 37 states currently use. Under current TCJA law, all pass-through business entities can utilize a SALT cap workaround solution if their resident state offers this option and they elect to use it.

The June 28 Senate Finance draft proposed extending the $10,000 SALT cap and introducing a new 50% limitation on the PTET deduction that would have applied to all pass-through entities, not just SSTBs.

However, in the final text passed by the Senate on July 1, key SALT changes were made:

The Senate-passed version would increase the SALT cap to $40,000 in 2025, $40,400 in 2026, and by an additional 1% in 2027-2029. The cap would revert to the current $10,000 in 2030.
The Senate-passed bill also calls for phasing out the deduction at a modified adjusted gross income of $500,000 in 2025, but would set the phaseout threshold at $505,000 in 2026 and increase it by 1% thereafter. The Senate, like the House, would not reduce the cap to below $10,000 via income-based phaseouts.
Crucially, the Senate removed the 50% limitation on the SALT PTET deduction, preserving TCJA’s current law treatment, allowing full deductibility of SALT PTET on state tax returns. The SALT cap workaround remains unchanged

This move was welcomed by the AICPA, which emphasized that the final bill maintains tax parity between pass-through entities and corporations, avoids complexity, and supports the competitiveness of small businesses. The organization warned that reimposing PTET limits would have introduced confusion and unfairness into the tax code.

As the bill proceeds to reconciliation, I will closely monitor the process to ensure the final legislation maintains the Senate’s more inclusive treatment of SALT and PTET deductions.

Update June 28: Senate Modifies SALT Cap and PTET Deduction in Latest Draft

On June 27, 2025, Senate Republicans released a revised version of their draft tax bill. Most notably, it increases the SALT deduction cap to $40,000 for tax year 2025, with a gradual phase-down through 2029, before reverting to the original $10,000 cap. Additionally, the Senate retains the PTET deduction for all pass-through entities, but introduces new limits: an individual’s total SALT deduction—including PTET—is capped at the sum of the standard $10,000 SALT deduction plus the greater of $40,000 or 50% of the PTET amount paid on their behalf. This still represents a more inclusive approach than the House version, which excludes SSTBs. This blog post is updated for the revised June 27 Senate bill.

Original article published June 25:
The Senate takes a more balanced approach to SALT and PTET rules, avoiding punitive carve-outs and restoring deductions for traders and service professionals.

Senate Republicans released a draft tax reform bill on June 16 that sharply diverges from the House’s approach to the state and local tax (SALT) deduction and the pass-through entity tax (PTET). Unlike the House version, which aggressively targets specified service trades or businesses (SSTBs), the Senate draft restores PTET deductions for all pass-throughs, offering welcome relief to traders, CPAs, and other professionals.

Senate Holds the Line on $10,000 SALT Cap.

The 2017 Tax Cuts and Jobs Act (TCJA) expires after 2025, caps the SALT itemized deduction at $10,000 annually. In response, 37 states enacted PTET regimes allowing pass-through entities to deduct state taxes at the entity level, effectively bypassing the SALT cap for eligible business owners. This is known as the SALT cap workaround solution.

The House bill proposes raising the SALT cap to $40,000 with income-based phaseouts. It denies PTET deductions to SSTBs and retains the PTET deduction for non-SSTBs like manufacturers and tech companies. By contrast, the Senate draft initially kept the SALT cap at $10,000 as a placeholder.

However, the June 27 Senate revision expands the SALT deduction cap to $40,000 for 2025, with a gradual phase-down over four years, returning to $10,000 by 2030. This revision reflects negotiations aimed at easing the SALT burden in high-tax states.

PTET Deduction Extended to All Professions, with Limits

In a notable departure from the House bill, the Senate version eliminates SSTB exclusions. Instead, it applies a uniform PTET limitation: an individual’s total SALT deduction—including PTET—is capped at:

The standard $10,000 SALT cap plus
The greater of $40,000 or 50% of the PTET tax paid on their behalf.

This structure is intended to curb perceived abuses of high PTET payments while maintaining fair access to SALT relief. While more restrictive than the current law—which in many states allows near-total deduction—this framework avoids discriminatory carve-outs against service professionals. Under the Senate proposal, traders operating in PTET-eligible entities and qualifying for trader tax status (TTS) would retain access to this key deduction. However, sole proprietors, employees, and investment companies are not eligible for TTS and remain excluded.

Outlook and Next Steps

The Senate Finance Committee’s draft remains under discussion, with a floor vote anticipated as early as late June. If the Senate passes the bill, it will proceed to House-Senate reconciliation. The outcome will determine whether PTET parity and SALT deduction relief endure in the finalized legislation.

As many taxpayers discovered under the TCJA, SALT cap limitations have been a major driver of increased federal tax bills, especially in high-tax states. The Senate proposal takes a more balanced approach, extending PTET relief without penalizing service professionals.

GreenTraderTax will continue monitoring developments and advising traders and professionals on year-end planning implications.

PTET Deduction Cap (June 27 Senate Draft – Section 70601)

“An individual’s total SALT deduction, including any PTET passed-through, is limited to:

The regular $10,000 cap on SALT deductions ($5,000 MFS), plus

The greater of:

$40,000 ($20,000 for married filing separately), or

50% of the total PTET paid on their behalf.

Additionally, PTETs that fail federal eligibility criteria—such as those in jurisdictions without individual income tax or with inflated entity-level rates—would be disallowed.” (SALT Alert: Senate Tax Bill Targets SALT Cap Workarounds, Including New Limits on PTET Deductions, from Supra.com)

Darren Neuschwander, CPA, contributed to this article.

Don’t Miss The Election For The SALT Cap Workaround

October 5, 2021 | By: Robert A. Green, CPA | Read it on

Many states recently enacted “SALT cap workaround” legislation enabling pass-through entities (PTE) to deduct entity-level SALT payments as a business expense in place of non-deductible itemized deductions over the “SALT cap” of $10,000 per individual tax return. Currently, 20 states have enacted this legislation, and others are considering it.

The SALT cap workaround is not automatic in most states; the owner must file an election for PTE treatment by the deadline, which varies by state. The PTE election deadline for New York State is October 15, 2021. Connecticut’s pass-through entity (PTE) tax for the SALT cap workaround is mandatory, which is unique. In most states, the owner can make the election with a timely filed tax return, which is more convenient.

It’s also essential in most states to pay PTE estimated taxes. For a 2021 business expense deduction on the federal return, make the estimated tax payments before December 31, 2021.

See my updated blog posts on the SALT cap workaround below. As an excerpt, here are some of the updates for NYS and CA.

You can also search “SALT cap workaround” for your state. Several states published FAQs, and many local CPA firms have blog updates about it.

This alert applies to pass-through entities (PTE), including LLCs, taxed as partnerships or S-Corps. It’s doesn’t apply to sole proprietors. For traders, the PTE must be eligible for trader tax status (TTS).

New York State

NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, August 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.

New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.”

NYS Tax Department: Deadline approaching to opt into pass-through entity tax (PTET) (NYS October 6, 2021)
“To opt-in: Log in to your S corporation’s or partnership’s Business Online Services account. (If the business doesn’t have an account, we recommend creating one by October 8 to avoid missing the election deadline.).”

California

SALT workaround elective pass-through entity tax (Spidell’s California Minute July 18, 2021)

Pass-through entity tax FAQs released by FTB (Spidell September 30, 2021)
“The FTB anticipates releasing the new pass-through entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”

Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.” That means the 2021 PTE return due to be filed in 2022.

Other blog posts:

How to Deduct State and Local Taxes Above SALT Cap

Unlock State & Local Tax Deductions With A SALT Cap Workaround. See updates by state.

How to Deduct State and Local Taxes Above SALT Cap

August 3, 2021 | By: Robert A. Green, CPA | Read it on

Updates: As states progress on SALT cap workaround legislation, I update that news at the bottom of my prior post: Unlock State & Local Tax Deductions With A SALT Cap Workaround.

Are you disenfranchised from state and local tax deductions because you exceed the SALT cap of $10,000 per year?

Organizing an LLC for your business can convert non-deductible SALT into a business expense. Seventeen states have enacted SALT cap workaround laws, and several others are working towards enactment. IRS Notice 2020-75, issued on Nov. 9, 2020, gave the green light to these state laws. Most states drafted their rules to comply with this notice.

These state laws seem to include a trading business eligible for trader tax status (TTS) but not investment companies. (The reason: TTS entities have business expense treatment, whereas investment companies have suspended investment expenses.)

The states that have enacted SALT cap workaround laws with the effective date:

Alabama (2021)
Arkansas (2022)
Arizona (2022)
California (2021)
Colorado (2022)
Connecticut (2018)
Georgia (2022)
Idaho
Louisiana (2019)
Maryland (2020)
Minnesota (2021)
New Jersey (2020)
New York (2021)
Oklahoma (2019)
Rhode Island (2019)
South Carolina (2021)
Wisconsin (2018/2019)

There is pending legislation in Illinois, Massachusetts, Michigan, North Carolina, Oregon, and Pennsylvania. (Most have passed, see updates).

These SALT cap workaround laws don’t significantly impact state revenues and incentivize entrepreneurs to remain in their state. Even if Congress repeals or revises the SALT limitation, the SALT cap workaround is the better option since you can deduct business expenses from gross income versus itemized deductions subject to an AMT limitation.

California’s new law automatically repeals its SALT cap workaround if Congress repeals the SALT cap limitation. For details on California and several other state laws, see ongoing updates to my June 22, 2021 blog post, Unlock State & Local Tax Deductions With A SALT Cap Workaround. Also, the podcast SALT workaround elective pass-through entity tax (Spidell’s California Minute, July 18, 2021) is an excellent listen for California residents.

TTS traders have other compelling reasons to consider an LLC partnership or S-Corp.

A new LLC taxed as a partnership or S-Corp (pass-through entity PTE) can elect Section 475 MTM within 75 days of inception. That comes in handy since the individual sole proprietor deadline for a 475 election has passed. Section 475 provides tax-loss insurance through its exemption from wash sales and the capital loss limitation. Also, it offers a chance to get a 20% qualified business income (QBI) deduction on TTS/475 net income.
An LLC taxed as an S-Corp unlocks health insurance and retirement plan deductions for TTS traders.

Now more than ever before may be the time to form your TTS entity, but you need to act quickly. Trading in an entity brokerage account for at least all Q4 2021 will help you qualify for TTS. The entity can only pay SALT business expenses on the entity income.

Many states require an election, some by partner, and SALT PTE tax payments have due dates. Dig into the details of your state, and we can help. Don’t miss the boat!

Darren Neuschwander, CPA, contributed to this blog post.

Unlock State & Local Tax Deductions With A SALT Cap Workaround

June 22, 2021 | By: Robert A. Green, CPA | Read it on

Updates: As states progress on SALT cap workaround legislation, I will update that news at the bottom of this post. Also, see my August 3, 2021 blog post, How to Deduct State and Local Taxes Above SALT Cap.

Since 2018, taxpayers living in high-tax states have been unable to take an itemized deduction of state and local taxes over a limitation (known as the “SALT” cap) of $10,000 per year. This limitation came from the 2017 Tax Cuts and Jobs Act (TCJA) and is effective for tax years 2018 through 2025. But the good news is that some states have a workaround, which I cover in this post.

On Nov. 9, 2020, Treasury and the IRS issued Notice 2020-75, which says they “intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.”

The Workaround
To date, state laws for SALT cap workarounds vary, but the general idea is that a pass-through entity (PTE) assesses a tax at the state’s rate on individuals. The state then grants the respective owners of the PTE a tax credit on their state personal income tax return. The SALT cap only applies to individual taxes, not PTE entity-level taxes. Other states subject the PTE to an entity-level tax and then exclude that respective PTE income from the owner’s state tax return.

Check the latest news in your state to see if your state has enacted a SALT cap workaround when the tax law is effective (i.e., 2021 or 2022) and how it works. For example, Connecticut made the PTE tax mandatory for the SALT cap workaround strategy. Most of the other states make it elective, giving the taxpayer more choices; however, don’t miss the election deadline. Consult your tax advisor to see how this strategy might save you money and whether you should consider forming a pass-through entity soon in 2021.

Traders seem to qualify for the SALT cap workaround
Many traders eligible for trader tax status (TTS) already use a PTE like a spousal-member LLC/partnership or single-member LLC/S-Corp. TTS traders need an S-Corp to pay officer compensation to unlock health insurance and retirement plan deductions, which otherwise are not allowed on trading gains that are unearned income.

A TTS trader in securities, commodities, and other financial products, has business expense treatment. A TTS trader actively buys and sells capital assets with capital gains and losses, or Section 475 ordinary gains and losses, if elected on a timely basis.

Here’s an example: In 2021, Joe Trader pays $35,000 of state income taxes on the S-Corp level using a SALT cap workaround. His S-Corp net income is $500,000, subject to a state tax rate of 7%. Joe reaches his SALT cap of $10,000 with real estate taxes of $11,000, so he loses a $1,000 deduction. Joe deducts $35,000 of the S-Corp state taxes from his gross income saving $12,950 in federal taxes ($35,000 state tax deduction x 37% top marginal federal tax rate). Without a SALT cap workaround, Joe would have $36,000 of non-deductible SALT.

Next steps
Many accountants had taken a wait-and-see approach on SALT cap workaround strategies since IRS approval was uncertain before the November 2020 IRS notice mentioned above. In addition, the IRS and Treasury previously rejected recharacterizing SALT payments as charitable contributions, which a few states attempted.

This PTE tax approach is not foreign; some southeastern states use PTE composite returns to assess tax on non-resident owners.

Some tax pundits expected the Biden administration to repeal the SALT cap. However, President Biden’s FY 2022 budget and recent infrastructure bills do not include the reversal of the SALT cap. Congressional Republicans are resistant to undermine TCJA. Some Congressional Democrats stated they might not support Biden’s infrastructure bills unless they fix the SALT cap. Stay tuned!

The PTE tax might be a better solution than pre-TCJA law when SALT was an itemized deduction and a preference for alternative minimum tax (AMT).

Updated news by state below

IRS Signals Approval of Entity-Level SALT Cap Workaround, But States Should Still Think Twice (Tax Foundation Nov. 11, 2020)
“Treasury and IRS signaled their intention to bless one type of state workaround for the $10,000 State and Local Tax (SALT) deduction cap: entity-level taxes that allow owners of pass-through businesses to pay an additional state tax at the business level, with an offsetting credit against their individual income tax liability. Since the SALT deduction cap does not apply to business taxes, this functionally allows these owners to avoid the cap, since the entity-level tax substitutes for their income tax payment, which would have been subject to a capped deduction.”

“Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have all adopted entity-level taxes which offer credits against the owners’ personal tax liability. In Connecticut, the entity-level tax is mandatory. In the other six states, it is elective; business owners can choose to pay it and claim the credit, or may decline if it is not in their best interest to go that route.”

New Jersey enacts SALT deduction cap workaround (Grant Thorton Feb. 14, 2020)
NJ Bill Would Amend SALT Cap Workaround (Law360 Dec 13, 2021).
“A.B. 6185 would make changes to the credit structure and calculation method of the elective pass-through entity tax. According to the bill, the new way of calculation would allow for a larger credit to be obtained by a payer of the optional tax. The bill would also realign the tax’s brackets to align with the new state tax brackets, the bill said.”

California Lawmakers, Governor Float SALT Cap Workaround Plans (Bloomberg Tax Jan. 14, 2021)
“A new California Senate bill (SB 104) would give pass-throughs—partnerships, limited liability companies, and S corporations—the option to pay an entity-level income tax that would be fully deductible. The bill doesn’t specify a tax rate yet. Individuals who are members of those businesses would exclude the amount the entity pays from their gross income.” (Governor) Newsom’s proposal is narrower, applying only to S corporations. It would give those businesses the option to pay a 13.3% income tax rather than the 1.5% that California currently imposes on S corporations. Shareholders would get a tax credit equal to 13.3% of their passed-through income. Under current California law, an S corporation’s income is also taxable at the shareholder level.”
Calif. Gov. Updates Budget With Tax Rebates, SALT Workaround (Law360 May 14, 2021)
California budget deal reached: More stimulus payments and tax relief (Spidell News June 28, 2021)
“The Governor and legislative leaders announced that they have reached a budget deal. Major tax-related items contained in the deal include an elective passthrough entity tax, which provides a work-around to the $10,000 SALT deduction limitation for owners of passthrough entities…These provisions are contained in draft legislation that has not yet been enacted, although it is anticipated that these bills will be passed within the next week or two.” https://leginfo.legislature.ca.gov/.
SALT Cap Workaround, Tax Credit Boosts Go To California Governor (Bloomberg Tax July 1, 2021)
“A California workaround to the $10,000 federal cap on state and local tax deductions, expanded tax credits, and new grants for businesses are included in bills lawmakers sent Thursday to Gov. Gavin Newsom (D). Tax policy changes in a bill lawmakers passed Thursday (A.B. 150) include a workaround for the $10,000 cap on state and local tax deductions for S corporations and their shareholders. The corporations could pay 9.3% income tax rather than the 1.5% rate California currently imposes. Shareholders would get a tax credit equal to 9.3% of their passed-through income. The workaround would be in effect for taxable years 2021 through 2025 and taxpayers would have to use the option on original, timely filed tax returns.
Calif. Joins States With SALT Cap Workaround (Law360 July 16, 2021)
“Gov. Gavin Newsom, a Democrat, signed A.B. 150… he reiterated his position that the cap on the SALT deduction should be lifted but said California would provide “a partial fix” for S corporations and other pass-throughs. California’s SALT workaround for pass-through entities will be an elective tax that the entity pays on behalf of partners. The partners can then receive a credit. The tax rate will be 9.3% and will fall on the distributive shares of income of the partners. Individual partners can choose not to consent, but the entity can still elect to pay the tax. Those partners who do consent will get a nonrefundable credit that equals the amount of tax paid by the entity on the partners’ behalf. The pass-through workaround will begin for tax year 2021 and sunset after tax year 2025, according to the analysis.”
SALT workaround elective passthrough entity tax (Spidell’s California Minute July 18, 2021)
Passthrough entity tax FAQs released by FTB (Spidell Sept. 30, 2021)
“The FTB anticipates releasing the new passthrough entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”
Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.”

New York Includes SALT Cap Workaround in Budget Deal (Bloomberg April 6, 2021)
“The deal between New York Gov. Andrew Cuomo (D) and Democratic legislative leaders, announced Tuesday, would allow pass-through businesses to pay taxes at the entity level. The entity-level tax would be offset by a corresponding individual income tax credit.”
New York Governor Signs Bill That Could Provide Pass-Through Entities a SALT Deduction Cap Workaround (NYSSCPA April 10, 2021)
New York State Budget Provides A Work Around To The Federal SALT Cap For Certain Business Entities (Forbes May 27, 2021)
SALT Cap Workaround Rules Due Soon From New York Tax Department (Bloomberg Tax Aug. 19, 2021)
“New York business owners hankering to seize on a fresh tax break may get guidance from the state’s tax department as early as next week, according to a source familiar with the matter.”
NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, Aug. 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.
New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.“
New York Pass Through Entity Tax Update & How to Actually Make the Election (linkedin.com) (Sept. 21, 2021)
New York’s Passthrough Entity Tax (CliftonLarsonAllen LLP Sept. 30, 2021).
“Only an authorized person, as defined, may make this election on behalf of an eligible S corporation or partnership. The PTET election application can be filed electronically by creating a business online services account with the New York State Department of Taxation and Finance.

Alabama Lawmakers Advance Changes to SALT Cap Workaround (Tax Notes April 15, 2021)
Ala. Floats Rule For SALT Cap Workaround (Law360 Sept. 1, 2021)
“The rule, published in Tuesday’s state register, would provide that required annual payments are the lesser of 100% of the tax shown for the taxable year or 100% of the tax shown for the preceding year. The proposed rule also provides that while an entity is transitioning to being taxed at the entity level, required estimated quarterly payments will be 25% of the required annual payment.”

La. Senate Approves SALT Cap Workaround For Pass-Throughs (Law360 May 23, 2021)

SALT Workarounds Spread to More States as Democrats Seek Repeal (Bloomberg Tax April 27, 2021)
“Seven states, including California and Illinois, are poised to join nearly a dozen others like New York and New Jersey that have skirted around the federal cap on state and local tax deductions as the prospect of a federal fix remains elusive. New York and Idaho both recently passed legislation to work around the controversial 2017 tax law feature known as the SALT cap. Georgia and Arizona are awaiting their governors’ approvals of similar SALT cap workarounds, and lawmakers in California, Massachusetts, Illinois, North Carolina, and South Carolina are debating bills of the same nature.” (See the state map of states included in the workaround.)

Massachusetts Lawmakers Push SALT Cap Workaround in Budget (Bloomberg Tax May 11, 2021)
Mass. Senate OKs Budget With Child Credit, SALT Workaround (Law360 June 2, 2021)
“The pass-through provision is similar to other entity-level taxes that states have either enacted or are considering as a workaround to the $10,000 state and local tax deduction cap. The pass-through entity-level tax provisions would take effect for taxable years beginning on and after Jan. 1, 2021.”
Mass. Legislators Pass Budget With SALT Workaround, Credits (Law360 July 9, 2021)
“The Massachusetts Legislature unanimously passed a fiscal year 2022 budget Friday that would establish an entity-level tax for pass-through businesses…would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax.”
Mass. Gov.’s Budget Creates Tax Credits, Vetoes Deduction Delay (Law360 July 19, 2021)
“Republican Gov. Charlie Baker on Friday signed the budget bill while returning to the Legislature a provision that would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax, asking it to increase the credit portion. Baker returned the pass-through provision to the state Legislature with proposed amendments that would increase a member’s credit from 90% of their share in the entity’s tax to 100% of their tax share, saying that taxpayers should collect the full benefit as struggling businesses emerge from the pandemic. The pass-through entity-level tax provisions will take effect for taxable years beginning on and after Jan. 1, 2021.”
Massachusetts Lawmakers Override Governor on SALT Cap Fix (1) (Bloomberg Tax July 29, 2021)
“Both the governor and lawmakers agreed to a SALT cap fix that would allow individuals to get around the $10,000 deduction limit by having pass-through entities they are members of, like S corporations, pay the 5% state excise tax, instead of having income flow to individual members for taxation. The lawmakers’ measure, however, would allow the individual members a credit equal to the share of state taxes owed, multiplied by 0.9. This would bring in $90 million annually to the state, they estimate. Baker had wanted a 100% credit for individual members.”
Capital gains and Section 475 ordinary income is taxed at the 12% rate.

SC Offers SALT Cap Workaround Through Entity-Level Tax (Law360 May 19, 2021)
“Republican Gov. Henry McMaster signed S.B. 627 on Monday, allowing partnerships and S corporations to make an annual election to pay a 3% tax at the entity level while offering a corresponding income exclusion for owners and partners. The bill will take effect starting in tax year 2021.”
SC Issues Guidance On SALT Cap Workaround (Law360 Dec 3, 2021).
“The owners of pass-through entities that elect to pay tax at the entity level on income apportioned to South Carolina will have that income excluded from their state taxable income, the state Department of Revenue said in a ruling Friday.”

Illinois Assembly Approves SALT Workarounds for Partnerships (Bloomberg Tax May 31, 2021)
Illinois Enacts SALT Cap Workaround for Pass-Through Businesses (Bloomberg Tax Aug. 27, 2021)
Gov. “Pritzker signed S.B. 2531, which allows partnerships and S corporations to pay their income tax at the entity-level rate of 4.95% and then claim a credit on their state return.” The annual election is irrevocable and the tax benefit is available for tax years ending on or after Dec. 31, 2021, and before Jan. 1, 2026.
Ill. Offers Estimated Payment Penalty Relief For Entity-Level Tax (Law30 Sept. 9, 2021)
“Illinois will waive penalties for late estimated payments for the state’s new entity-level tax that acts as a workaround to the federal cap on state and local tax deductions, the state Department of Revenue announced Thursday.”

SALT Workaround for Pass-Throughs Advances to Michigan Governor (Bloomberg Tax June 23, 2021)
“The SALT cap workaround bill (H.B. 4288) could provide roughly $190 million in federal tax relief for Michigan businesses without costing the state a dime, according to a legislative fiscal statement. The measure would let pass-through businesses pay state and local taxes at the entity level starting in tax year 2021, allowing the full deduction of these taxes on federal returns instead of limiting the deduction amount the entity owners can currently claim on their flow-through income.”
Mich. Gov. Vetoes SALT Deduction Cap Workaround Bill (Law360, July 14, 2021).
Michigan’s governor vetoed a bill seeking to create an entity-level tax for pass-through businesses to sidestep the federal cap on state and local tax deductions, saying the bill’s $5 million cost to implement should be part of broader budget negotiations.
Mich. Lawmakers OK Budget Funding SALT Cap Workaround (Law360 Sept. 23, 2021)
“Michigan lawmakers approved a nearly $70 billion budget that includes funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that the governor previously vetoed due to reservations about the program’s cost.”
Michigan Budget Funds SALT Cap Workaround (Law360 Sept. 29, 2021)
“Michigan Gov. Gretchen Whitmer signed the state’s budget Wednesday, including a provision with funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that she previously vetoed due to reservations about the program’s cost.”
Mich. House Fast-Tracks Refiled SALT Cap Workaround Bill (Law360 Oct. 7, 2021)
“Michigan lawmakers moved quickly Thursday to allow a vote on a refiled entity-level tax bill to sidestep the $10,000 federal cap on state and local tax deductions, following the governor’s pledge to support the program after its funding was secured.”
Michigan House Passes Refiled SALT Cap Workaround Bill (Law360 Oct. 14, 2021).
“Michigan’s House of Representatives passed legislation Thursday that would offer an entity-level tax permitting pass-through businesses to sidestep the $10,000 federal cap on state and local tax deductions — a program for which the state’s budget specifically earmarked funding.”
Michigan Lawmakers OK SALT Cap Workaround (Law360Dec 15, 2021).
“Pass-through businesses in Michigan could sidestep the federal cap on state and local tax deductions under a bill headed to the governor’s desk.”

Democrats consider ‘SALT’ relief for state and local tax deductions (NBC News June 24, 2021)

Georgia Enacts Salt Cap Workaround For Tax Years Starting In 2022 (Windham Brannon)
“House Bill 149, which was signed into law, creates a SALT cap workaround for Georgia partnerships and subchapter S corporations.”

Maryland’s SALT Workaround: Impacts and Planning Opportunities (March 12, 2021)

Rhode Island Budgets For Salt Workaround (Aug. 2019)

Wisconsin enacts SALT deduction workaround with pass-through tax (Dec. 17, 2018)

IRS Provides Clarity Regarding Oklahoma’s Salt Cap Workaround (March 3, 2021)

North Carolina Republicans Introduce SALT Cap Workaround (Tax Notes April 8, 2021)
NC House OKs Budget With Tax Cuts, SALT Cap Workaround (Law 360 Aug. 13, 2021)
“Democratic Gov. Roy Cooper opposes H.B. 334.”

Ore. Senate OKs Trimming Biz Tax Break, SALT Workaround (Law360, June 17, 2021)
“Under S.B. 727, the state would create an elective entity-level tax on qualifying pass-through entities. The tax rate would be 9% for the first $250,000 of income and 9.9% for income above $250,000. If an entity elects to pay the tax, the owners would be allowed an offsetting tax credit to claim on their personal income tax returns.”

Colo. Lawmakers OK Entity-Level Taxation To Skirt SALT Cap (Law360, June 9, 2021)
“Under the bill, the state would allow pass-through entities t o elect to pay an entity-level tax for income tax years beginning on or after Jan. 1, 2022. The entity-level tax rate would be 4.55%, the same as the state’s flat income tax rate.”
Colo. Limits Tax Breaks, OKs SALT Workaround In Tax Overhaul (Law360, June 24, 2021)
Gov. signed “H.B. 1327 provides for the entity-level tax to circumvent the $10,000 SALT cap.”

Pa. Bill Seeks Entity-Level Tax To Bypass SALT Deduction Cap (Law360 June 29, 2021)
“H.B. 1709, introduced Monday by Rep. Martina A. White, R-Philadelphia, would allow partnerships and S corporations to elect to be taxed at the entity level while providing an offsetting credit to owners and shareholders.”

Arizona House Panel OKs Entity-Level Tax To Skirt SALT Cap (Law360 Feb. 18, 2021)
Ariz. Adopts High-Earner Tax Bypass, SALT Cap Workaround (Law360 July 12, 2021)
“Arizona will create an alternative business income tax and an entity-level tax, bypassing both a state income tax surcharge on high earners and the federal cap on state and local tax deductions under two bills signed by the governor. H.B. 2838 will allow partnerships and S corporations to elect to pay a 4.5% tax at the entity level and offer a credit to the entity’s partners, members or shareholders for their pro rata share of the tax, according to a bill analysis. The entity-level tax election will be available only if all of an entity’s members, partners or shareholders are Arizona residents. The bill will take effect on Jan. 1, 2022, and the credit is allowed to be carried forward for up to five consecutive years.”

A Closer Look at Minnesota’s Proposed SALT Cap Workaround (Minnesota Center for Fiscal Excellence)
Minn. To Offer SALT Cap Workaround, PPP Loan Tax Relief (Law360 July 1, 2021)
“Democratic Gov. Tim Walz signed into law H.B. 9. The law creates an entity-level tax for pass-through entities with a refundable credit for entity members, allowing them to bypass the $10,000 state and local tax cap…starting tax year 2021”

Ark. Bill Floats SALT Cap Workaround With Pass-Through Tax (Law360 Jan. 20, 2021)

Some states now offer certain business owners a workaround for cap on state and local tax deduction (CNBC July 22, 2021)

Sens. Endorse Easing SALT Cap, Killing ARPA Tax Cut Limits (Law360 Aug. 11, 2021)
“Under the budget resolution Democrats advanced early Wednesday, a priority for the Senate Finance Committee would be “SALT cap relief.” No definition of relief or other detail is provided… Sen. Chuck Grassley, R-Iowa, offered an amendment to the budget resolution to leave the SALT cap untouched, calling the SALT deduction a provision “that mainly benefits the wealthy.” However, the amendment failed 48-51.”

California Drivers And Ohio Musicians: SALT In Review (Law360 Sept. 3, 2021)
“The good folks at the Institute on Taxation and Economic Policy released a report on potential changes to the SALT deduction limits. ITEP looked at several scenarios:”

NJ Dem Reps Say No SALT Cap Repeal, No Reconciliation (Law360 Sept. 20, 2021)
“A group of New Jersey congressional Democrats said Monday that they will vote against a proposed $3.5 trillion reconciliation bill unless the federal deduction for state and local taxes is fully restored.”

Entity-Level Taxes Grow, But Future Uncertain, Tax Atty Says (Law360 Sept. 23, 2021)
“Although 20 states have adopted pass-through taxes at the entity level as a workaround to the $10,000 cap on the federal deduction for state and local taxes paid, these regimes face a highly uncertain future, a tax professional said Thursday. This month, Democrats on the House Ways and Means Committee released a preliminary $2.9 trillion package of tax increases that left out a repeal of the SALT cap. But House Ways and Means Chairman Richard E. Neal, D-Mass, and Ways and Means members Rep. Bill Pascrell, D-N.J. and Rep. Tom Suozzi, D-N.Y., said afterward that although the measure was left out, they were committed to enacting a law “that will include meaningful SALT relief.”

2nd Circ. Rejects States’ Challenge To Fed. SALT Cap (Law360 Oct. 5, 2021)
“The federal $10,000 deduction cap on state and local taxes is constitutional, the Second Circuit said Tuesday, finding a challenge to the limitation by Maryland, New York, New Jersey and Connecticut…”

SALT-Cap Relief Faces Rollback as Democrats Eye Less Spending (Bloomberg Tax Oct. 4, 2021)
“Democrats risk settling for a less generous expansion of the state and local tax deduction than previously hoped after President Joe Biden conceded that lawmakers will have to scale back his economic agenda to get it enacted.”

Ohio Bill Seeks Entity-Level Tax To Bypass SALT Cap (Law360 Oct. 6, 2021)
“Under the (proposed) bill, entities that elect to be taxed at the entity level would have to make separate, irrevocable elections each tax year, starting in the entity’s tax year that begins in 2022. The tax rate would be 5% for 2022 and would then be the rate on taxable business income, currently 3%, for later years.”

Darren L. Neuschwander, CPA, contributed to this blog post.