The 2025 tax reset brings significant changes to the state and local tax (SALT) deduction and renewed importance to pass-through entity tax (PTET) planning for business owners. While the SALT cap increases to $40,000 for 2025, limitations and income-based phaseouts mean many high earners will see only modest relief. With most states, including California, continuing pass-through entity tax regimes, now is the time for business owners to revisit their multiyear SALT and PTET strategy to maximize federal tax savings.
1. The SALT Deduction: Bigger Cap, But Limitations Remain
The One Big Beautiful Bill Act (OBBBA) increased the SALT deduction cap to $40,000 for 2025 ($20,000 MFS), with small annual increases through 2029. Beginning in 2030, the cap reverts to $10,000.
However, the expanded deduction comes with important caveats:
- Phaseout (“SALT Torpedo”): The $40,000 cap begins phasing down once MAGI exceeds $500,000, fully reducing back to $10,000 at $600,000.
- Refunds may become taxable: Higher deductible tax payments may cause more state income tax refunds to be federally taxable.
- Itemizers only: Taxpayers must itemize on Schedule A to benefit.
- Eligible taxes include income, property, and sales taxes, but not federal taxes, HOA fees, transfer taxes, utilities, etc.
For many high-income taxpayers, the increased cap helps, but not nearly enough to make state taxes fully deductible.
Planning Insight: Even with a higher SALT cap, many high-income taxpayers lose most of the benefit due to income-based phaseouts. PTET elections often remain the most effective way to convert nondeductible state taxes into federal deductions.
2. PTET Still Delivers Significant Federal Savings
Despite the higher SALT cap, PTET remains the most effective workaround for owners of S corporations, partnerships, and multi-member LLCs. PTET shifts state tax payments to the entity level, where they are generally treated as deductible business expenses not subject to the SALT cap.
Why PTET still matters:
- Entity-level deductions reduce federal K-1 income.
- Credits flow through to owners to offset personal state tax.
- PTET elections often produce significantly more federal tax savings than relying solely on Schedule A.
Example:
A California S corp owner with $1.2M of passthrough income might lose nearly all benefit of the $40,000 SALT cap due to the MAGI phaseout. Using the PTET, the owner could shift more than $100,000 of California tax to the entity and potentially save $36,000–$44,000 federally.
3. PTET Rules Still Vary Significantly by State
Each state’s PTET election mechanics differ, from annual elections, to required prepayments, to how credits pass through to partners or shareholders. Multistate pass-throughs need to model:
- Differences in election deadlines
- Required mid-year deposits
- Credit carryover rules
- Potential double taxation if credits do not align with owner-level reporting
- Cash-flow impact on the business
Annual coordination among all owners is essential before electing.
4. Spotlight on California: PTET Remains Highly Valuable
California’s PTET continues to be one of the strongest planning opportunities for high-income business owners.
Key points:
- Applies to S corps, partnerships, and multi-member LLCs.
- Converts state income tax into a deductible federal business expense.
- Owners receive a California tax credit (subject to limits).
- AMT savings may also be available.
- SB 132 (effective 2026) offers more flexible election rules, though June 15 prepayments remain best practice.
2025 elections are closed, but planning for 2026 should begin early, especially around cash-flow needs and prepayment strategies.
5. What CPAs Should Be Doing Now
For 2025–2026 planning:
- Model whether the taxpayer will itemize and benefit from the expanded SALT cap.
- Evaluate whether the client is subject to the SALT cap phaseout.
- Run PTET projections for 2025–2026 to determine optimal entity-level payments.
- Identify multistate interaction issues and credit limitations.
- Assess cash-flow needs for June 15 and year-end PTET payments.
- Coordinate elections across all owners annually.
Business owners should work closely with a CPA to model SALT deductions and PTET elections across multiple years and states.
Bottom Line
The higher SALT deduction cap for 2025 offers meaningful—but limited—relief for many taxpayers. For high-income business owners, PTET planning continues to be one of the most powerful tools for reducing federal tax exposure. A proactive, state-specific, multiyear strategy that layers SALT deductions with entity-level PTET elections will be essential to optimizing results in 2025 and beyond.
