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

Last Updated on September 4, 2025 by Robert Green

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.