SALT Cap Increase vs. PTET and the OBBBA: What Business Owners Should Know

When Congress passed the One Big Beautiful Bill Act (OBBBA), it promised meaningful relief for taxpayers constrained by the state and local tax (SALT) deduction cap. On the surface, the change seems substantial: a fourfold increase in the deduction, from $10,000 to $40,000, starting in tax year 2025. But as we’ve advised our business clients, the details behind the bill reveal significant limitations.

The increased deduction comes with strings attached, including a phase-down for higher-income earners, an expiration date after 2029 and an inflation adjustment that barely keeps pace with rising costs. Many high-income business owners may see little to no benefit,  particularly those with pass-through income exceeding $500,000 or layered multi-entity structures.

That’s why the SALT deduction cap change, while helpful in some cases, is not the full story. The bigger takeaway is that the Pass-Through Entity Tax (PTET) continues to be one of the most reliable strategies for preserving deductions and minimizing federal tax exposure.

What OBBBA actually changes — and what it doesn’t

The original SALT cap, introduced by the 2017 Tax Cuts and Jobs Act, limited individuals to deducting no more than $10,000 in state and local taxes — including income and property tax — on their federal return. This cap applied across the board, regardless of how many pass-through entities were involved or how much state tax liability a business owner incurred.

OBBBA raises that cap to $40,000 per return beginning in 2025. The key word here is “per return.” Married couples filing jointly can deduct up to $40,000 combined, not per person. For those filing separately, the deduction limit is $20,000 each. This change allows for a larger deduction of personal income and property taxes, particularly for business owners who operate in high-tax states or hold income-generating real estate.

However, the benefit phases out quickly. If a taxpayer’s modified adjusted gross income (MAGI) exceeds $500,000, the deduction is reduced by 30% of the amount over that threshold. For example, a taxpayer with $600,000 in MAGI would see their SALT cap reduced by $30,000. This would bring their deduction down to just $10,000, right back where it was before the bill passed.

That figure is scheduled to adjust slightly each year, but the increase is fixed at just 1% annually. It is not indexed to inflation in a meaningful way. In fact, the statute sets the 2026 cap at $40,400, which is hardly enough to make a difference in high-cost areas where property taxes and state income taxes continue to rise.

Another important note: The SALT cap has never applied to taxes paid directly by a business in the course of operations. Real estate taxes, for example, paid by an S corporation or LLC as part of its trade or business are fully deductible at the entity level. OBBBA does not change this. The increased SALT cap applies only to itemized deductions on individual returns.

This makes it clear that the SALT deduction increase, while newsworthy, doesn’t reach as far as many hoped.

So who actually benefits from this provision? Moderate-income filers with income below the $500,000 threshold may see some savings. A manufacturing executive with $400,000 in total income who itemizes deductions could deduct a greater share of their state taxes, potentially reducing federal taxable income by tens of thousands of dollars. But the moment that same executive crosses the income threshold, the deduction shrinks significantly.

Why the PTET still matters, even with a higher cap

When the $10,000 SALT deduction cap first took effect, many states introduced a workaround in the form of Pass-Through Entity Tax (PTET) elections. These laws allow partnerships and S corporations to pay state income tax at the entity level, converting a nondeductible personal tax into a fully deductible business expense.

This workaround proved especially valuable for high-income business owners, many of whom exceed the MAGI phase-out threshold under the new SALT cap. With the OBBBA’s $40,000 limit reduced or eliminated for these taxpayers, the PTET remains the only way to capture meaningful deductions on state income taxes.

While more than 30 states now offer a PTET election, the rules vary significantly. Some require elections to be made annually, while others mandate irrevocable choices or limit eligibility based on residency and allocation. These complexities haven’t changed with the passage of OBBBA, and they still require careful coordination across state lines.

So who benefits most from PTET in a post-OBBBA world? Consider the following examples:

• A Florida-based healthcare group owns clinics across Georgia, New York and New Jersey. With a MAGI above $650,000, the owners no longer benefit from the new SALT cap. By electing PTET in the states where they operate, they can still deduct the full amount of state income tax at the entity level.
• A multi-state construction firm based in California has significant taxable income and a large team of W-2 employees. Because its pass-through income exceeds $500,000, the firm’s owners get little benefit from the higher SALT deduction. But they can still deduct entity-level tax payments through PTET elections in California, Oregon and other conforming states.
• A manufacturing company structured as an S corporation allocates income to owners in both Florida and Texas — states with no personal income tax. However, the company also does business in Illinois and Minnesota, which impose income taxes on passthroughs. Electing PTET in those states allows the business to deduct these taxes federally, even though the owners themselves would not benefit from itemizing.

In each of these examples, the PTET strategy produces stronger, more predictable federal deductions than the expanded SALT cap alone, especially once phaseouts are considered.

And there’s another important point: Even taxpayers who take the standard deduction can benefit from PTET. Since the entity pays the tax and deducts it before passing income to the owner, the owner receives the full benefit without needing to itemize. That’s not the case with SALT deductions taken on Schedule A.

Side by side: PTET vs. SALT cap under OBBBA

To help clients compare their options, we’ve modeled the federal deduction outcome under three scenarios for 2025:

While the OBBBA cap may help lower- and moderate-income taxpayers, most high-income pass-through owners will see a deduction similar to the pre-OBBBA law. PTET remains the most effective approach for those who exceed the $500,000 MAGI threshold.

That said, it’s not an either-or decision and not one size fits all. Some clients may benefit from both, using PTET in certain states while claiming the personal deduction where it still applies. But those strategies need to be coordinated across multiple returns and carefully reviewed to avoid duplication or errors.

Entity structuring and planning considerations under the new SALT rules

The SALT cap increase is prompting many business owners to revisit how their income flows through to their personal tax returns and how their entity structure influences that outcome. With the $40,000 cap now in play (and PTET still available), the right configuration could affect both federal tax savings and administrative complexity.

For example, many S corporations and LLCs have historically distributed income in a way that maximized state-level deductions through PTET elections. Now, with a higher SALT cap on the table for some filers, there may be an incentive to shift more state tax obligations back to the individual level. That said, such a move only makes sense if the owner’s income remains well below the phaseout threshold.

In cases where income regularly exceeds $500,000, or where multiple businesses feed into one taxpayer’s return, it often remains more efficient to pay the tax at the entity level. This is especially true for businesses operating in several states, where cross-jurisdictional allocation and apportionment rules can create costly errors if not handled correctly.

Entity structuring decisions should also consider how the SALT cap interacts with other deductions and credits. A taxpayer who itemizes because of the increased SALT cap may now find additional value in mortgage interest or charitable deductions. In contrast, a business that uses PTET and doesn’t itemize at the personal level can still benefit from full deductibility, but won’t realize secondary benefits tied to itemized filing.

Ultimately, planning under the new SALT rules requires coordination. The right strategy depends on a variety of factors, including total pass-through income, state residency, filing status and long-term tax projections.

At James Moore, we help clients analyze both sides of the equation — individual and business — and align their structures to optimize tax efficiency. Whether you’re restructuring compensation models, evaluating state-by-state elections, or preparing for a liquidity event, understanding how these layers interact is key to building a sustainable tax strategy.

Industry-specific implications: What businesses should watch for

The impact of the SALT cap change varies widely by industry and by how revenue is earned, allocated and taxed across states.

Construction companies

Firms with out-of-state projects or mobile workforces are often subject to state-level income tax in multiple jurisdictions. Since these businesses frequently exceed the $500,000 income threshold, the SALT cap increase won’t provide much direct relief.

However, PTET elections in states like New York, California and Oregon continue to offer reliable federal deductions. Construction firms should also factor in the timing of WIP schedules and the tax implications of completed-contract versus percentage-of-completion accounting methods when reviewing SALT strategy.

Real estate businesses

Real estate developers and investors typically hold assets in LLCs or partnerships, many of which flow income through multiple layers to individual owners. Because property taxes paid at the entity level were never subject to the SALT cap, this group already benefits from built-in deductibility.

That said, PTET remains an effective tool for owners with additional state income tax exposure, especially in high-tax states. The SALT cap increase may provide incremental value only for those with lower overall income and simplified ownership structures.

Healthcare organizations

Medical practices structured as pass-through entities often face income tax liability in more than one state, particularly when operating regional networks or employing telehealth professionals across state lines.

For high-earning physicians and group owners, the SALT cap increase will likely be phased out, meaning PTET remains the most impactful strategy. Florida-based practices with operations in states like Georgia or New York should consider PTET elections to retain federal deductibility without relying on Schedule A.

Manufacturers

Mid-sized manufacturing companies structured as S corporations can face a particularly complex SALT planning environment. Sales-based apportionment, nexus rules and sourcing standards differ across states, which makes entity-level deductions more appealing from a compliance and efficiency standpoint.

For manufacturers with facilities or customers in SALT-conforming states, PTET elections should still be the primary planning tool. However, the SALT cap increase may allow some secondary owners or passive investors to benefit from personal itemized deductions, particularly if they fall under the MAGI limit.

No matter the industry, SALT strategy needs to be proactive, not reactive. Businesses with pass-through income should engage in multi-layer planning. This includes evaluating federal deduction options, coordinating PTET elections and adjusting entity-level allocations well in advance of tax deadlines.

SALT cap relief or PTET strategy? Why businesses need both on the table

The OBBBA’s increase to the SALT deduction cap has grabbed headlines, but the reality is more nuanced. While the change offers limited benefit to moderate-income business owners, the combination of a high-income phase-out, minimal inflation indexing and a hard sunset in 2029 means most high-earning taxpayers won’t see the full $40,000 deduction. For companies in areas where income and state-level obligations often exceed these thresholds, the Pass-Through Entity Tax remains the more reliable tool for federal tax relief.

To make the most of these changes, businesses should:

• Review entity structures and income allocation methods
• Evaluate whether PTET elections remain the best fit
• Coordinate between personal and entity-level planning
• Track income thresholds and state-by-state conformity rules
• Update estimates, elections and documentation before year-end

At James Moore, we work closely with clients to model outcomes under both SALT cap and PTET strategies, ensuring each approach is tailored to their industry, entity type and financial goals. If you’re unsure how the OBBBA impacts your 2025 return or whether your current elections are still the best path forward, we can help.

Contact a James Moore professional to review your structure and build a plan that works in 2025 and beyond.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.