SALT cap receives modest and temporary update in the One Big Beautiful Bill Act

ARTICLE | July 16, 2025

Authored by RSM US LLP

Executive summary: The SALT deduction limitation lives another day

The state and local tax deduction limitation (SALT cap) proved to be one of the more visible provisions of the One Big Beautiful Bill Act (OBBBA). It was not only the subject of fierce disagreement, including among members of both parties, but a sticking point that appeared to have the potential to extend the debate over the OBBBA’s passage or even derail it entirely. The cap’s future had been debated for years leading up to the OBBBA with numerous proposals to maintain the cap, albeit at a reduced revenue cost. This article provides a high-level summary of the amended cap and initial considerations for pass-through entities not already elected into state pass-through entity taxes.

SALT cap: Temporarily increased with income limitations

Ultimately, a compromise to save the SALT cap was found between the cacophony of policymakers, taxpayers, and members of Congress. The OBBBA raises the SALT limitation to $40,000 ($20,000, for married separate filers) beginning in 2025 through tax year 2029, after which the limitation will revert to $10,000 ($5,000 for married separate filers).

The limitation is phased down for taxpayers with modified adjusted gross income (AGI) over $500,000 ($250,000 for married separate filers) for the same period. Under this phasedown, the $40,000 limitation is reduced by 30% of the excess of modified AGI over the threshold amount, not to be reduced below $10,000.

Both the limitation and the modified AGI threshold are increased by 1% each year through 2029.

Pass-through entity taxes (PTET)

Notably, the OBBBA makes no changes to the deductibility of PTETs by a pass-through entity, what types of taxpayers can make state PTET elections, or the ability of taxpayers to make state PTET elections.

The final legislation omitted some changes that the House of Representatives approved on May 22 and others that the Senate proposed in its first draft of legislative text; more specifically, restrictions and, in some cases, complete limitations on a pass-through entity’s ability to deduct state PTET.

Next steps for pass-through entities

Accordingly, for most highly profitable flow-through entities, the analysis of whether to elect into a state PTET regime does not meaningfully change.

Through the end of 2025, 36 states and New York City provide a PTET election that would subject the pass-through entity to an entity-level tax in lieu of the owners’ being subject to an individual income tax on their distributive share of earnings. A few state elections are expiring at the end of 2025—including Illinois, Oregon, and Utah—but are generally anticipated to be re-enacted next year.

While this may seem like a simple analysis, there are a myriad of considerations for pass-through entities and their owners to consider before electing into a PTET. For example:

• Do all pass-through entities qualify?

• Must all members agree to elect into the tax and will all members benefit from electing into the pass-through entity tax?

• How is the taxable base calculated?

• Sourcing rules may be different for the entity versus the individual member. These differences may have a significant impact for some taxpayers.

• How does a pass-through entity treat net operating losses?

• Is depreciation from basis step-up adjustments deductible at the entity level?

• Is the amount paid by the entity fully creditable or excluded in the same state for the member?

• Are there other administrative complexities that may outweigh the ultimate savings?

• Is a full credit of the tax paid by the entity available for individual tax purposes? (for example, the elective tax in Massachusetts provides a 90% credit)

There may also be other tax considerations that make the election undesirable. For example, in large, multistate partnerships, a PTET election may provide tax savings for select owners, while increasing tax on other owners, thus producing an unintended result.

Understanding whether a pass-through entity election results in a benefit requires modeling and detailed analysis of all the risks and opportunities involved. Pass-through entities and their owners would be well advised to conduct thorough due diligence to understand how and whether any PTET election is ultimately beneficial.

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