As the December 31, 2025 expiration date for key provisions of the Tax Cuts and Jobs Act (TCJA) approaches, CPAs face increasing questions from clients about the State and Local Tax (SALT) deduction cap and its implications. This blog explores the current SALT landscape, potential changes on the horizon, and strategic considerations CPAs should be discussing with their clients in 2025.
Current SALT Deduction Rules
The TCJA of 2017 imposed a $10,000 cap ($5,000 for married filing separately) on the federal deduction for state and local taxes, including property taxes plus state income or sales taxes. This cap, which was previously unlimited, significantly impacted taxpayers in high-tax states like New York, California, New Jersey, and Connecticut.
Currently, the SALT cap applies to individual taxpayers who itemize deductions but not to businesses. Without congressional action, the cap will expire after December 31, 2025, reverting to the pre-TCJA unlimited deduction status.
Potential Changes to the SALT Cap
The SALT deduction has become a focal point in the ongoing tax reform discussions. Several proposals have emerged, including:
- Increasing the cap: The House Ways and Means Committee has proposed raising the cap to $30,000 for taxpayers making $400,000 or less.
- Income-based modifications: Some lawmakers have suggested higher caps for certain income levels or different caps for single versus married filers.
- Complete repeal: Some legislators, particularly from high-tax states, advocate eliminating the cap entirely.
- Permanent extension: Others support making the current $10,000 cap permanent beyond 2025.
Recent reports indicate a tentative agreement may exist to increase the cap to $40,000, but negotiations remain fluid. The fiscal impact of any change is significant—researchers at the Penn Wharton Budget Model estimate that removing the cap entirely could cost over $1.1 trillion in federal revenue over the 2025-2034 budget window.
SALT Cap Workarounds: Pass-Through Entity Taxes
In response to the SALT cap, many states have implemented workarounds, with the Pass-Through Entity Tax (PTET) emerging as the most widely adopted strategy. The IRS effectively blessed this approach in Notice 2020-75, issued in November 2020.
How PTET Workarounds Function
The PTET allows pass-through businesses—partnerships, S corporations, and certain LLCs—to pay state taxes at the entity level rather than passing the tax liability to individual owners. Since businesses aren’t subject to the SALT cap, this effectively bypasses the $10,000 limitation. Individual owners then receive a state tax credit or deduction on their personal returns for their share of these entity-level taxes.
As of 2025, more than 35 states have enacted some form of PTET legislation, though the specific provisions vary significantly by state. Key variations include:
- Whether the election is annual or permanent
- Filing deadlines for making the election
- Tax rates applied to the pass-through income
- Credit mechanisms for owners
- Treatment of resident versus nonresident owners
- Qualifying business types and income sources
Strategic Considerations for CPAs
- Client Education About the Current Landscape
Many clients may not fully understand how the SALT cap affects their specific situation. CPAs should:
- Explain the current $10,000 limitation and its expiration timeline
- Assess whether clients are actually limited by the cap (many who take the standard deduction are unaffected)
- Quantify the impact on high-income clients in high-tax states
- Clarify how potential changes would affect their tax situation in 2026 and beyond
- Entity Structure Reviews
The existence of PTET workarounds creates planning opportunities around entity structure:
- Consider converting single-member LLCs to partnerships or S corporations
- Evaluate whether real estate holdings should be held in pass-through entities
- Assess multi-state implications for clients with business activities in multiple jurisdictions
- Examine whether investment partnerships qualify for PTET elections in relevant states
- Multi-State Planning Complexities
For clients with operations or income in multiple states, CPAs should:
- Compare PTET provisions across relevant states
- Consider resident tax credit implications
- Evaluate the interplay between home state and source state PTET elections
- Develop multi-year projection models that account for state-specific rules
- Timing of PTET Elections
Timing considerations matter significantly:
- Most states require annual elections with specific deadlines
- Some states allow elections made on timely filed returns
- Estimated payment requirements vary widely by state
- Year-end planning should incorporate PTET election decisions
- Documentation and Compliance
Given the complexity of PTET provisions, robust documentation practices are essential:
- Maintain clear documentation of PTET election decisions
- Track state-specific filing requirements and deadlines
- Develop checklists for annual PTET compliance
- Consider disclosure requirements for financial statement purposes
Potential Pitfalls and Limitations
While PTETs offer significant benefits, CPAs should be aware of several limitations:
- Disparate treatment of residents and nonresidents: Some state PTET provisions create different outcomes for resident versus nonresident owners.
- Impact on other tax benefits: Entity-level taxes may affect qualified business income deductions, basis calculations, and other aspects of tax planning.
- Cash flow considerations: Clients need to understand the timing impacts of entity-level tax payments versus individual estimates.
- State conformity to federal changes: Any federal changes to the SALT cap will likely trigger state-level legislative responses.
- Administrative complexity: Managing PTET elections across multiple entities and states creates significant compliance burdens.
Looking Ahead: 2026 and Beyond
While the current focus is on the 2025 expiration, CPAs should also be preparing clients for potential post-2025 scenarios:
- If the SALT cap expires without extension, clients may need to revisit state tax planning strategies.
- If a modified cap is implemented, the value of PTET elections will need reassessment.
- Even if the SALT cap expires, PTET elections may still provide benefits in some situations.
- Expect continued legislative activity at both federal and state levels through 2025 and beyond.
Action Items for CPAs
- Educate staff on SALT developments: Ensure your team understands the current landscape and potential changes.
- Develop client communication strategies: Create materials explaining the SALT expiration and planning opportunities.
- Build projection tools: Develop models to illustrate different SALT scenarios for client planning.
- Review client portfolios: Identify clients most affected by the SALT cap who might benefit from PTET elections.
- Monitor legislative developments: Stay current on both federal proposals and state-level PTET changes.
- Consider professional development: Invest in specialized training on multi-state taxation and PTET strategies.
Conclusion
The SALT landscape remains one of the most dynamic areas of tax planning as we approach the 2025 TCJA expiration date. CPAs who proactively address these issues with clients will provide significant value through this period of uncertainty and change. While the ultimate fate of the SALT cap remains unclear, understanding the current rules, available workarounds, and potential changes allows for effective planning regardless of the legislative outcome.
By taking a strategic approach to SALT planning now, CPAs can help clients navigate this complex landscape and potentially realize significant tax savings in 2025 and beyond.
Please continue to monitor legislative activity through eventual passage.
As the December 31, 2025 expiration date for key provisions of the Tax Cuts and Jobs Act (TCJA) approaches, CPAs face increasing questions from clients about the State and Local Tax (SALT) deduction cap and its implications. This blog explores the current SALT landscape, potential changes on the horizon, and strategic considerations CPAs should be discussing with their clients in 2025.
Current SALT Deduction Rules
The TCJA of 2017 imposed a $10,000 cap ($5,000 for married filing separately) on the federal deduction for state and local taxes, including property taxes plus state income or sales taxes. This cap, which was previously unlimited, significantly impacted taxpayers in high-tax states like New York, California, New Jersey, and Connecticut.
Currently, the SALT cap applies to individual taxpayers who itemize deductions but not to businesses. Without congressional action, the cap will expire after December 31, 2025, reverting to the pre-TCJA unlimited deduction status.
Potential Changes to the SALT Cap
The SALT deduction has become a focal point in the ongoing tax reform discussions. Several proposals have emerged, including:
- Increasing the cap: The House Ways and Means Committee has proposed raising the cap to $30,000 for taxpayers making $400,000 or less.
- Income-based modifications: Some lawmakers have suggested higher caps for certain income levels or different caps for single versus married filers.
- Complete repeal: Some legislators, particularly from high-tax states, advocate eliminating the cap entirely.
- Permanent extension: Others support making the current $10,000 cap permanent beyond 2025.
Recent reports indicate a tentative agreement may exist to increase the cap to $40,000, but negotiations remain fluid. The fiscal impact of any change is significant—researchers at the Penn Wharton Budget Model estimate that removing the cap entirely could cost over $1.1 trillion in federal revenue over the 2025-2034 budget window.
SALT Cap Workarounds: Pass-Through Entity Taxes
In response to the SALT cap, many states have implemented workarounds, with the Pass-Through Entity Tax (PTET) emerging as the most widely adopted strategy. The IRS effectively blessed this approach in Notice 2020-75, issued in November 2020.
How PTET Workarounds Function
The PTET allows pass-through businesses—partnerships, S corporations, and certain LLCs—to pay state taxes at the entity level rather than passing the tax liability to individual owners. Since businesses aren’t subject to the SALT cap, this effectively bypasses the $10,000 limitation. Individual owners then receive a state tax credit or deduction on their personal returns for their share of these entity-level taxes.
As of 2025, more than 35 states have enacted some form of PTET legislation, though the specific provisions vary significantly by state. Key variations include:
- Whether the election is annual or permanent
- Filing deadlines for making the election
- Tax rates applied to the pass-through income
- Credit mechanisms for owners
- Treatment of resident versus nonresident owners
- Qualifying business types and income sources
Strategic Considerations for CPAs
- Client Education About the Current Landscape
Many clients may not fully understand how the SALT cap affects their specific situation. CPAs should:
- Explain the current $10,000 limitation and its expiration timeline
- Assess whether clients are actually limited by the cap (many who take the standard deduction are unaffected)
- Quantify the impact on high-income clients in high-tax states
- Clarify how potential changes would affect their tax situation in 2026 and beyond
- Entity Structure Reviews
The existence of PTET workarounds creates planning opportunities around entity structure:
- Consider converting single-member LLCs to partnerships or S corporations
- Evaluate whether real estate holdings should be held in pass-through entities
- Assess multi-state implications for clients with business activities in multiple jurisdictions
- Examine whether investment partnerships qualify for PTET elections in relevant states
- Multi-State Planning Complexities
For clients with operations or income in multiple states, CPAs should:
- Compare PTET provisions across relevant states
- Consider resident tax credit implications
- Evaluate the interplay between home state and source state PTET elections
- Develop multi-year projection models that account for state-specific rules
- Timing of PTET Elections
Timing considerations matter significantly:
- Most states require annual elections with specific deadlines
- Some states allow elections made on timely filed returns
- Estimated payment requirements vary widely by state
- Year-end planning should incorporate PTET election decisions
- Documentation and Compliance
Given the complexity of PTET provisions, robust documentation practices are essential:
- Maintain clear documentation of PTET election decisions
- Track state-specific filing requirements and deadlines
- Develop checklists for annual PTET compliance
- Consider disclosure requirements for financial statement purposes
Potential Pitfalls and Limitations
While PTETs offer significant benefits, CPAs should be aware of several limitations:
- Disparate treatment of residents and nonresidents: Some state PTET provisions create different outcomes for resident versus nonresident owners.
- Impact on other tax benefits: Entity-level taxes may affect qualified business income deductions, basis calculations, and other aspects of tax planning.
- Cash flow considerations: Clients need to understand the timing impacts of entity-level tax payments versus individual estimates.
- State conformity to federal changes: Any federal changes to the SALT cap will likely trigger state-level legislative responses.
- Administrative complexity: Managing PTET elections across multiple entities and states creates significant compliance burdens.
Looking Ahead: 2026 and Beyond
While the current focus is on the 2025 expiration, CPAs should also be preparing clients for potential post-2025 scenarios:
- If the SALT cap expires without extension, clients may need to revisit state tax planning strategies.
- If a modified cap is implemented, the value of PTET elections will need reassessment.
- Even if the SALT cap expires, PTET elections may still provide benefits in some situations.
- Expect continued legislative activity at both federal and state levels through 2025 and beyond.
Action Items for CPAs
- Educate staff on SALT developments: Ensure your team understands the current landscape and potential changes.
- Develop client communication strategies: Create materials explaining the SALT expiration and planning opportunities.
- Build projection tools: Develop models to illustrate different SALT scenarios for client planning.
- Review client portfolios: Identify clients most affected by the SALT cap who might benefit from PTET elections.
- Monitor legislative developments: Stay current on both federal proposals and state-level PTET changes.
- Consider professional development: Invest in specialized training on multi-state taxation and PTET strategies.
Conclusion
The SALT landscape remains one of the most dynamic areas of tax planning as we approach the 2025 TCJA expiration date. CPAs who proactively address these issues with clients will provide significant value through this period of uncertainty and change. While the ultimate fate of the SALT cap remains unclear, understanding the current rules, available workarounds, and potential changes allows for effective planning regardless of the legislative outcome.
By taking a strategic approach to SALT planning now, CPAs can help clients navigate this complex landscape and potentially realize significant tax savings in 2025 and beyond.
Please continue to monitor legislative activity through eventual passage.