Of the many tax code changes proposed in the One Big Beautiful Bill (OBBB) Act, one of the most prominent for individual taxpayers, particularly business owners, is the change to the state and local tax (SALT) deduction. Under current law, the SALT deduction is limited to $10,000 ($5,000 for married taxpayers filing separately). Many states have introduced pass-through entity taxes (PTET) as a means for businesses to reduce federal taxable income without reporting state taxes on the individual level, thus circumventing this limitation. 

The OBBB, passed by the House on May 22, proposes significant changes to the SALT deduction beginning in 2025. 

• The limitation on the deduction, often referred to as the “SALT cap,” would rise from $10,000 to $40,000 for most taxpayers. 

• However, the increased limitation would phase out by 30% of the excess of modified adjusted gross income above $500,000. Note that the phaseout cannot reduce the deduction below the amount allowed under current law. 

• For married taxpayers filing separately, both the SALT cap and phaseout threshold are halved. 

• Both the SALT cap and income threshold would increase by 1% annually before being permanently set beginning in 2034.

In addition to changing the SALT cap, the OBBB would place restrictions on the ability to take a deduction for the PTET for certain taxpayers.  

• The bill proposes that PTET for taxpayers classified as specified service trades or businesses (SSTBs) under Section 199A would not be deductible at the entity level. Rather, these taxes would be deductible at the individual level and subject to the SALT cap. In other words, PTET for SSTBs – including but not limited to professional service firms, medical practices, financial service providers, entertainment companies, and sports franchises – would no longer lead to lower federal taxable income reported to the business’s owners, potentially eliminating the benefit of PTET for this class of business. 

• Taxpayers not classified as SSTBs under Section 199A (a “qualified” business) would still be eligible to deduct PTET at the entity level. The bill specifies that businesses with gross revenues of 75% or more from qualified activities will be treated as qualified businesses.

What does CohnReznick think?

The increase in the SALT cap would be taxpayer-friendly, allowing for many to see an increased deduction for SALT paid relative to current law. However, not all taxpayers would benefit. Taxpayers with high incomes may see little to no change relative to current law because of the phase-out in income. This may particularly sting given that these often are the taxpayers with the highest SALT burden. With that said, the law does not allow the deduction to drop below the current level even with the phaseout. As such, taxpayers should expect to see at least the same itemized deduction for SALT under the proposed law as is allowed under current law.

The codification of PTET for qualified businesses as deductible outside of the cap is also beneficial for the owners of operating partnerships and S corporations, enshrining in law that PTET is not subject to the SALT cap. With that said, the owners of SSTBs may not appreciate that this tax strategy would no longer be available to them.

What should taxpayers consider now?

While there are a number of steps before the OBBB becomes law and the above provisions may change along the way, there are a few actions taxpayers can take now to prepare.

1) Review sources of gross receipts from a business

a. If 75%+ of the business’s revenue comes from qualified activities, the business may want to evaluate the PTET regime(s) for the state or states it operates in as business owners may be entitled to a benefit.

b. If 25%+ of the revenue comes from SSTB activities, the business may want to revisit whether PTET is beneficial for tax years beginning in 2026. Given that the deduction would fall under the SALT cap, it may no longer be worthwhile.

2) Revisit business structures

a. If a business has gross receipts from both qualified and SSTB sources, it is possible that SSTB revenues could taint the business for purposes of the PTET deduction. Consider whether it is feasible and advantageous to split the qualified and SSTB activities into separate entities.