The 2017 Tax Cuts and Jobs Act fundamentally reshaped the federal tax landscape. One of its most controversial provisions was the imposition of a $10,000 cap on the deductibility of state and local taxes. For many taxpayers, particularly those in high-tax states, this cap sharply reduced the value of itemized deductions. In response, more than 20 states enacted “SALT cap workarounds,” allowing pass-through entities such as S corporations and partnerships to pay state income tax at the entity level, thereby circumventing the federal cap.
Recently, policymakers have revisited the SALT deduction and raised the limitation from $10,000 to $40,000 under the One Big Beautiful Bill Act. This change dramatically alters the cost-benefit analysis of the SALT workarounds. This article examines the impact of the $40,000 limitation compared to the original $10,000 cap, focusing on micro-sized businesses (those with less than $500,000 in gross annual income). We also consider the ethical implications of state-level workarounds and whether a higher SALT cap reduces inequities in the tax system.
SALT limitations and state responses
Under the $10,000 limitation enacted by the TCJA, taxpayers with significant property taxes or state income tax liabilities often saw their deductions curtailed. States such as Connecticut, California, New York and Colorado quickly enacted entity-level tax regimes that allowed PTEs to elect entity-level taxation, thus restoring the deductibility of these state taxes for federal purposes. The IRS approved this approach in
With the limitation now expanded to $40,000, the calculus changes significantly. Many households, including micro-sized business owners, may find their full SALT obligations fall within the higher threshold, making state-level workarounds less critical.
Comparative analysis: $10,000 vs. $40,000 cap
To illustrate the shift, consider the following simplified scenarios. Each involves a taxpayer with $150,000 in pass-through entity income, $7,500 in property tax, and approximately $20,000 in other itemized deductions.
Scenario A: $10,000 SALT cap: Under the original $10,000 limitation, a taxpayer paying both property tax and state income tax would often exceed the deduction ceiling. For example, a taxpayer with $7,500 in property taxes and $11,250 in state income tax would face a combined $18,750 SALT burden but could deduct only $10,000. Electing the entity-level workaround allowed most or all of the property tax to be deducted, leading to modest but meaningful federal tax savings.
Scenario B: $40,000 SALT cap: With a $40,000 cap, the same taxpayer could deduct their entire $18,750 SALT burden without the need for entity-level taxation. This largely eliminates the benefit of the workaround at moderate income levels. The workaround may still be helpful for higher-income taxpayers in states with high property or income taxes, but the average micro-sized business owner will now see less reason to pursue the added complexity.
Side-by-side comparison tables: $10,000 vs. $40,000 cap
The following tables provide a simplified comparison of tax outcomes for micro-sized business owners under the original $10,000 SALT limitation and the updated $40,000 cap. These examples highlight how the higher cap reduces the value of entity-level workarounds for most taxpayers, including single and married filing jointly taxpayers.
Scenario 1: $150,000 PTE income
Scenario 2: $400,000 PTE income
As these tables show, the $10,000 cap created strong incentives to use entity-level SALT workarounds. With a $40,000 cap, the deduction covers most taxpayers’ SALT obligations directly, making the workaround far less relevant except for the highest-income households in the highest-tax states.
Ethical considerations of SALT workarounds
The SALT cap was originally enacted because the SALT deduction disproportionately benefits upper-income households who itemize deductions and live in high-tax states. SALT workarounds were enacted to combat congressional intent, occupying an ambiguous ethical space.
On one hand, states were acting to protect their residents from what many high-income earners considered an unfair federal limitation. On the other hand, the workarounds undermined congressional intent and created inequities between taxpayers in different states. Affluent taxpayers with the resources to engage sophisticated advisors were often the greatest beneficiaries.
The expansion of the SALT cap to $40,000 reduces some of the workaround concerns. Many upper-middle-class and micro-business households now have their full SALT obligations covered without special elections. This levels the playing field by reducing the need for complex workarounds that were disproportionately accessible to higher earners and multistate operators. From an ethical standpoint, a higher cap enhances transparency and reduces reliance on legislative loopholes.
The $10,000 SALT limitation prompted states to devise creative workarounds that helped some but not all taxpayers. For micro-sized businesses, these workarounds were often too complex to be worth the administrative burden. With the cap now raised to $40,000, many small business owners can fully deduct their SALT obligations without relying on these mechanisms. While the workarounds technically remain available, their relevance diminishes under the new limitation. The higher cap mitigates ethical concerns of the workaround provisions by making the tax system less dependent on strategic state-level maneuvering.
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