SALT cap workarounds

Before 2018, an individual generally could deduct an unlimited amount of state and local property and income taxes from income for federal income tax purposes.¹ The Tax Cuts and Jobs Act changed that, effectively increasing taxes on many individuals who work or reside in high-tax states. Since 2018, an individual generally can deduct no more than $10,000 of state and local property and income taxes.² This limitation will continue to apply until 2026.³

In response to this cap on the deductibility of state and local taxes (SALT), more than 30 states have enacted a workaround involving an entity-level tax and a (generally) offsetting tax benefit for its owners. The state imposes an income tax on a pass-through entity, such as a partnership, a limited liability company that’s classified as a partnership for federal tax purposes, or an S corporation. This tax is sometimes called a pass-through entity (PTE) tax. In most states, this tax is elective.

¹ IRC §§ 164(a) and (b) (before amendment by Pub. Law 115-97, § 11042). 

² IRC § 164(b)(6)(B). In the case of a married individual filing separately, the cap is $5,000. 

³ Id.