With the passage of the One Big Beautiful Bill Act (OBBBA), many business owners are asking an important question:
Now that the SALT deduction cap has increased to $40,000, do Pass-Through Entity Taxes (PTETs) still provide value?

The short answer: Yes—often more than ever, especially for higher-income pass-through business owners.

What Changed Under the OBBBA?

The OBBBA increased the personal State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for tax years 2025 through 2029.

However, this higher cap:

• Phases out for higher-income taxpayers

• Does not eliminate the advantages of PTET elections

• Does not apply at the business level

What Are Pass-Through Entity Taxes (PTETs)?

PTETs allow eligible businesses—such as:

• Partnerships

• Multi-member LLCs

• S corporations

to pay state income taxes at the entity level, rather than having owners pay them personally.

Because the tax is paid by the business:

• It is fully deductible as a federal business expense

• It is not subject to the SALT limitation

• Owners typically receive a state tax credit or income exclusion

The IRS has explicitly approved this structure.

Why PTETs Still Matter After the SALT Cap Increase

1. High-Income Owners Lose the $40,000 Benefit

For 2025:

• The $40,000 SALT cap phases out once MAGI exceeds $500,000

• At $600,000+ MAGI, the cap drops back to $10,000

Many business owners will still be unable to deduct their full state taxes personally, making PTETs highly valuable.

2. Lower Federal and Self-Employment Taxes

When PTETs are paid:

• Pass-through income is reduced

• Federal income tax is lower

• Self-employment tax is reduced (for partners and LLC members)

This can result in thousands of dollars in additional tax savings.

3. PTETs Reduce Adjusted Gross Income (AGI)

PTET deductions reduce income above the line, lowering AGI.
This can help business owners:

• Avoid the 3.8% Net Investment Income Tax (NIIT)

• Reduce or avoid Medicare IRMAA surcharges

• Increase deductions tied to AGI limits (medical, charitable, etc.)

• Prevent phaseouts of:

  • Child Tax Credit

  • Education credits

  • IRA deductions

  • Rental loss deductions

  • Qualified Business Income (QBI) deduction

Lower AGI often creates multiple downstream tax benefits.

4. PTETs Work Well with the Standard Deduction

By shifting state taxes to the business:

• Personal itemized deductions may drop below the standard deduction
  
  

• Taxpayers can then claim the larger standard deduction
  
  

• Result: lower taxable income overall
  
  

This strategy becomes even more effective starting in 2026, when new above-the-line charitable deductions take effect.

5. Important Consideration: QBI Deduction Impact

PTETs reduce qualified business income dollar-for-dollar, which may slightly reduce the 20% QBI deduction.

However, in many cases:

• The federal tax savings

• The AGI-related benefits

• The self-employment tax savings

Outweigh the reduction in QBI

This must be evaluated on a case-by-case basis.

Bottom Line

Even with the expanded SALT deduction under the OBBBA, PTET elections remain a powerful tax-planning strategy—especially for:

• High-income business owners

• Owners in high-tax states

• Partnerships and LLC members subject to self-employment tax

The right approach depends on income level, business structure, and long-term planning goals.