State and Local Tax (SALT) Deduction: The $10,000 Cap and Pass-Through Entity Tax Workaround

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The state and local tax (SALT) deduction allows individual taxpayers who itemize to deduct state and local taxes paid (income tax, property tax, and sales tax) on their federal return. The TCJA capped this deduction at $10,000 per return ($5,000 for married filing separately) starting in 2018. The OBBBA raised the cap to $40,000 per individual ($80,000 MFJ) beginning in 2025, providing significant relief for taxpayers in high-tax states. However, even the $40,000 cap can be exceeded by business owners in states like California (13.3% income tax), New York (10.9% + NYC surcharge), and New Jersey (10.75%). The pass-through entity tax (PTET) election, now available in over 30 states, provides a workaround: the S-Corp or partnership pays the state tax at the entity level (where it is fully deductible against federal income as a business expense), and the owners receive a credit on their individual state return. This effectively removes the state tax from the SALT cap.

✓Key takeaway

SALT cap timeline:

Period	SALT Cap
Pre-TCJA (before 2018)	Unlimited
TCJA (2018-2024)	$10,000 ($5,000 MFS)
OBBBA (2025+)	$40,000 single / $80,000 MFJ

How the PTET workaround works:

Step	What Happens
1. Entity elects PTET	S-Corp or partnership elects to pay state income tax at the entity level
2. Entity pays state tax	The entity pays the state tax (deductible as a business expense on the federal return)
3. Owner gets state credit	Each owner receives a credit on their individual state return for their share of the entity-level tax
4. Federal deduction is unlimited	The entity’s state tax payment is a business deduction (Schedule K-1), NOT subject to the individual SALT cap

PTET availability by state (selected, 30+ states offer it):

State	PTET Available	State Tax Rate
California	Yes	Up to 13.3%
New York	Yes	Up to 10.9%
New Jersey	Yes	Up to 10.75%
Connecticut	Yes (mandatory)	6.99%
Illinois	Yes	4.95%
Georgia	Yes	5.49%
Virginia	Yes	5.75%
Massachusetts	Yes	5%
Oregon	Yes	9.9%
Florida	N/A (no state income tax)	N/A
Texas	N/A (no state income tax)	N/A

Who benefits from the PTET:

Taxpayer	SALT Without PTET	SALT With PTET	Federal Tax Savings
NY S-Corp owner, $200K income, $15K property tax	Capped at $40,000	State income tax bypasses cap	Varies
CA S-Corp owner, $300K income, $8K property tax	State income tax: ~$22K + $8K property = $30K (under new $40K cap)	May still help if total exceeds $40K	Varies
FL S-Corp owner	N/A (no state income tax)	N/A	$0

Important: the PTET does NOT reduce total state tax paid. It changes WHERE the deduction is taken (entity level instead of individual level) to avoid the SALT cap. The total state tax bill is the same.

How does the PTET election save money?

Hypothetical example

Round numbers. A married couple in New York. S-Corp owner. Combined income: $300,000. Property taxes: $18,000.

Without PTET election:

Tax	Amount
NY state income tax (6.85% effective on $300K)	$20,550
Property tax	$18,000
Total state and local taxes paid	$38,550
SALT deduction (2025 OBBBA cap: $80,000 MFJ)	$38,550 (under cap, fully deductible)

At $300,000 combined income, the $38,550 in SALT fits under the $80,000 cap, so the PTET provides no additional benefit. The PTET matters at higher income levels:

Revised: combined income $500,000 in New York.

Tax	Amount
NY state income tax (~8.5% effective on $500K)	$42,500
NYC surcharge (3.876% if in NYC)	$19,380
Property tax	$25,000
Total state and local taxes paid	$86,880
SALT deduction (2025 cap: $80,000 MFJ)	$80,000 (capped, $6,880 lost)

Federal tax cost of the $6,880 lost deduction: $6,880 x 35% marginal rate = $2,408 in additional federal tax

With PTET election: The S-Corp elects to pay NY state tax at the entity level. S-Corp’s share of income: $350,000 (owner’s K-1) NY PTET rate: 6.85-10.9% (graduated) Entity-level NY tax: approximately $28,000

Item	Without PTET	With PTET
Entity-level state tax paid	$0	$28,000
Federal deduction (entity, no SALT cap)	$0	$28,000
Individual NY state tax	$42,500	$14,500 (reduced by $28,000 credit)
Individual SALT deduction	$80,000 (capped from $86,880)	$14,500 + $19,380 + $25,000 = $58,880 (under cap)
Total federal deduction (entity + individual)	$80,000	$28,000 + $58,880 = $86,880
Lost SALT deduction	$6,880	$0
Federal tax savings from PTET		$2,408

The PTET election recovers the $6,880 in lost SALT deduction, saving $2,408 in federal taxes. The total state tax paid is the same ($42,500 + $19,380 + $25,000), but more of it becomes federally deductible.

When the PTET matters most (pre-OBBBA, $10K cap): Under the old $10,000 SALT cap (2018-2024), the same taxpayer would have:

Item	Without PTET (old cap)	With PTET
Individual SALT cap	$10,000	N/A (entity deduction is unlimited)
Lost SALT deduction	$76,880	$0
Federal tax savings from PTET		$26,908

The PTET saved $26,908/year under the old $10,000 cap. With the new $80,000 cap, the savings are much smaller ($2,408 in this example). The PTET remains valuable only for very high earners in very high-tax states whose total SALT exceeds $80,000 MFJ.

States where PTET still matters under the new $40K/$80K cap:

California owner with $500K+ income AND significant property tax
New York City resident (state + city = 12-15% combined rate) with $400K+ income
New Jersey owner with $600K+ income (10.75% rate)
Oregon owner with $400K+ income (9.9% rate)

For most small business owners in most states, the OBBBA’s $40,000/$80,000 cap eliminates the need for the PTET election. But business owners should still calculate it annually because the election is free (just a checkbox on the entity return) and only helps, never hurts.

How to elect PTET:

State	How to Elect	When to Elect
New York	Online election via NY DTF, then reported on Form IT-204-IP (partnership) or CT-34-SH (S-Corp)	By March 15 of the tax year
California	Election on entity return, irrevocable for the year	With the entity return
New Jersey	Online election via NJ Division of Taxation	By March 15
Most states	Election on the entity return or online portal	Varies (usually by March 15 or with the entity return)

Illustrative numbers only, not a real client and not advice for your facts.

How do you handle state tax obligations when your business operates in multiple states?

Multi-state businesses must determine their filing obligations in each state based on nexus (physical presence, economic thresholds, or factor-based), then apportion income using each state’s apportionment formula. Most states use a single-factor sales apportionment formula that assigns income based on where your sales are delivered, though some states still use a three-factor formula weighting sales, payroll, and property. Throwback and throwout rules in some states can increase your tax liability by reassigning sales revenue from states where you aren’t taxable back to your home state. The pass-through entity tax election available in most states allows S corps and partnerships to pay state income tax at the entity level and claim a federal deduction, effectively bypassing the $10,000 SALT deduction cap for owners.

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Cite this page

Yarik Yarosh, CPA. "State and Local Tax (SALT) Deduction: The $10,000 Cap and Pass-Through Entity Tax Workaround." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-state-tax-deduction-salt-limitation

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

State and Local Tax (SALT) Deduction: The $10,000 Cap and Pass-Through Entity Tax Workaround

How does the PTET election save money?

How do you handle state tax obligations when your business operates in multiple states?

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