The $40,000 SALT Cap and Whether the PTET Still Saves You Money

A married couple files jointly with about $700,000 of income, most of it from a profitable S-Corp one spouse owns. For years they watched their state income tax disappear against the old $10,000 SALT cap. When they heard the cap had jumped to $40,000, they assumed the problem was finally solved and told me they could drop the pass-through entity tax election. It was the wrong call, because their income is too high to keep the larger cap. This couple is theoretical, not an EntityIQ client, but the trap is real and it catches a lot of owners this year.

What OBBBA changed about the SALT cap

The One Big Beautiful Bill Act, signed July 4, 2025, rewrote IRC §164(b)(6), the provision that caps the itemized deduction for state and local taxes. The cap went from $10,000 to $40,000 for 2025, retroactive to January 1 of that year. For 2026 it rises to $40,400, and it grows by 1% each year through 2029 before snapping back to $10,000 in 2030. Married taxpayers filing separately get half of each figure. That covers your property tax, your state income tax, and any sales tax you elect to deduct instead, all lumped together under one ceiling.

The phaseout that erases the bigger cap

Here is the part the headlines skipped. The larger cap phases out once modified adjusted gross income passes $500,000 for 2025 and $505,000 for 2026. Above that threshold the cap is reduced by 30% of the excess MAGI, but never below a $10,000 floor. Run the 2026 numbers and the cap is fully ground back down to $10,000 once MAGI reaches about $606,333. So a household earning $700,000 is right back to the old $10,000 limit, exactly where it started before the bill passed.

That 30% giveback also creates a brutal marginal rate inside the phaseout zone. Between $505,000 and roughly $606,333 of MAGI, each extra dollar of income strips away 30 cents of deduction, which is its own hidden surtax stacked on top of the regular brackets. Owners who can time income or bunch deductions should pay attention to where they land in that band.

Why the PTET is untouched

The pass-through entity tax works on a completely different mechanism, and OBBBA left it alone. The PTET is paid and deducted at the business level, so it reduces the income that flows through to the owner before it ever reaches Schedule A. It is not subject to the $40,400 individual cap or the phaseout at all. The deduction rests on IRS Notice 2020-75, which confirmed that a state income tax imposed on and paid by the entity is deductible in computing the entity's nonseparately stated income, with no SALT cap applied.

There was a real scare during the legislative fight. The House version of the bill would have barred specified service trades or businesses, the doctors, lawyers, accountants, and consultants, from the PTET deduction starting in 2026. The Senate stripped that limitation out, and the final law leaves the pass-through entity tax fully intact for every qualifying entity, including SSTBs. If you read about the PTET being killed last summer, that provision did not survive.

The math, side by side

Take the couple above. Their S-Corp throws off $400,000 of profit taxed by a state with a flat 6% income tax, so the state income tax on the business is $24,000. They also pay $14,000 in property tax. Their $700,000 MAGI has already phased their personal SALT cap down to the $10,000 floor, and the property tax alone uses it up. Their marginal federal rate is 35%. The state gives the owner a credit for the tax the entity pays, so there is no extra state cost. The only thing that changes is the federal deduction.

The swing is $8,400 a year on one election, and the only thing standing between the two columns is whether the state tax sits on the business return or on Schedule A. For an owner whose MAGI has phased the personal cap back down to $10,000, the PTET is often the only way left to deduct state income tax on business profits.

It helps even if you take the standard deduction

One more point that gets missed. Because the PTET reduces the business income that flows through to your return, the benefit does not depend on itemizing. A taxpayer who takes the standard deduction still keeps the full federal value of the state tax the entity paid, which the SALT deduction on Schedule A can never offer. With the standard deduction now sitting well above $30,000 for joint filers, plenty of owners no longer itemize at all, and for them the PTET is not just better than the cap, it is the entire deduction.

When the bigger cap is actually enough

The PTET is not free. It means an extra entity-level filing, estimated payments to the state on the business's behalf, and a credit to track on your personal return. If your MAGI sits comfortably under $505,000 and your total state and local taxes for the year come in under $40,400, the higher cap may capture everything you owe, and layering a PTET election on top adds paperwork for little or no gain. The election earns its keep when your income tax on business profits is large, your MAGI is high enough to shrink the personal cap, or both. Run your own numbers before you decide, because the right answer flips entirely on where your MAGI lands.

If you want to see whether an S-Corp election and a PTET election work together for your situation, the EntityIQ calculator models the self-employment tax savings, and our guide on the PTET SALT cap workaround walks through the mechanics state by state. For the state-level filing steps, see how to make a Utah PTET election or a New Jersey BAIT election.

This article is educational and is not legal or tax advice. The figures above are 2026 amounts, and the couple is theoretical. State PTET rules vary widely, so please consult a qualified CPA before making any election.