Small Businesses, Big SALT Relief: Leveraging OBBBA’s Pass-Through Workaround

SALT Cap 101 (Why It Matters):

The federal State and Local Tax (SALT) deduction cap was introduced by the 2017 tax law. This cap limits individuals to deducting only $10,000 of state and local taxes on their personal returns. For many small business owners in high-tax states, this was a bitter pill to swallow. Pass-through entities, such as S corporations and partnerships, pay taxes through the owners’ personal returns. Thus, the $10,000 cap meant that many state tax payments went undeducted.

OBBBA’s New Opportunity:

Enter the One Big Beautiful Bill Act (OBBBA). Starting in 2025, OBBBA raises the SALT deduction limit to $40,000 for many taxpayers, although it phases out at higher incomes. More importantly, OBBBA preserves a key workaround for pass-through businesses. Many states allow partnerships and S corporations to elect to pay state taxes at the entity level. This makes those payments fully deductible as business expenses, rather than personal itemized deductions. The IRS approved this strategy in 2020, and OBBBA’s final version kept it intact. In short, small businesses can bypass the $10,000 cap by having their entity pay the taxes and credit the owners later. It’s a SALT solution that turns a personal expense into a business deduction.

How to Put the Workaround into Practice: Small businesses structured as pass-throughs should consider a few steps to seize this opportunity:

• Check Your State’s Rules: Over 35 states, including California, New York, and Georgia, now offer an elective pass-through entity tax as a SALT cap workaround. Check if your state has adopted this and whether your business qualifies.

• Elect and Deduct: If eligible, elect to have your partnership or S corporation pay state income taxes at the entity level. These payments become deductible business expenses, which reduce federal taxable income. Typically, you will receive a state tax credit for your share. This effectively sidesteps the personal SALT cap.

• Plan with a Beaconshire Advisor: Every state’s program is a bit different. Consult a Beaconshire Professional to determine if the election makes sense for you. Consider timing, cash flow (the business must pay the tax), and the mix of owners. Ensure the workaround benefits all partners and shareholders.

Looking Ahead: OBBBA’s SALT cap relief, with the higher $40,000 limit, lasts through 2029. After that, the cap will revert to $10,000 unless new legislation is introduced. However, the pass-through workaround could continue to be a valuable tool. This is especially true for higher-earning business owners who would max out the cap even at $40,000. This presents a forward-looking chance to salt away tax savings. Small businesses that act now, in partnership with their tax professionals, can turn a once-frustrating SALT cap into a strategic advantage.

Take Action Now: Don’t wait! Explore your state’s rules and plan ahead to maximize this OBBBA-fueled opportunity. Your future self—and your tax bill—will thank you.