At a Glance
State and local tax planning opportunities may be available through pass-through entity tax elections and the increased state and local tax deduction cap. Pass-through entity tax elections may allow qualifying businesses to deduct certain state income taxes at the entity level for federal tax purposes, while the increased SALT deduction cap may create additional planning opportunities for individuals who itemize deductions.
The available benefit depends on the taxpayer’s state of residence, entity type, income level, state tax obligations, and whether an applicable pass-through entity tax regime is available.
Key Takeaways
- As of September 17, 2026, 37 of the 41 states that impose personal income tax, plus New York City, have pass-through entity tax regimes.
- Pass-through entity tax elections may allow qualifying pass-through entities to deduct state income taxes at the entity level for federal purposes, bypassing the individual SALT deduction cap.
- Pennsylvania does not have a pass-through entity tax system as of September 17, 2026, but Pennsylvania residents who own S corporations may benefit from elections made in other states because Pennsylvania allows an out-of-state credit for S corporation owners.
- The SALT deduction cap increased from $10,000 to $40,000 for tax year 2025 and increases gradually through 2029 before returning to $10,000 in 2030.
- The enhanced SALT deduction is subject to an income-based phaseout for households with modified adjusted gross income above $500,000, but the allowable deduction does not fall below $10,000.
Who Is Affected
These planning opportunities may affect:
- Owners of partnerships, S corporations, and other qualifying pass-through entities
- Business owners with income apportioned to states that offer pass-through entity tax elections
- Pennsylvania residents who own S corporations with income in other states
- Individuals living in high-tax states
- Taxpayers who expect to itemize deductions
- Households with modified adjusted gross income above $500,000
Eligibility and Key Requirements
Eligibility Requirements
Pass-through entity tax regimes allow qualifying pass-through entities to pay state income tax at the entity level. The tax paid by the business may be deductible for federal purposes, reducing federal pass-through income and potentially avoiding the individual SALT deduction cap.
The availability and mechanics of a pass-through entity tax election depend on the applicable state’s rules. States generally use one of two approaches:
- The deduction method
- The credit method
Under the deduction method, the state pass-through entity tax payment is treated as a business expense and deducted on the business’s federal tax return.
Under the credit method, the entity pays state tax, the owner reports the owner’s full share of income on the state return, and the owner receives a credit for the owner’s share of tax paid by the business. The entity also deducts the tax at the federal level.
Limits, Thresholds, and Phaseouts
The SALT deduction cap is $40,000 for tax year 2025 and increases gradually through 2029. The cap returns to $10,000 in 2030.
The enhanced deduction is subject to the following modified adjusted gross income thresholds for married taxpayers filing jointly:
- Households with modified adjusted gross income below $500,000 receive the full benefit of the $40,000 deduction.
- The deduction begins to phase out when modified adjusted gross income exceeds $500,000.
- The available deduction does not fall below $10,000.
- The enhanced deduction is fully phased out when modified adjusted gross income exceeds $600,000.
The phaseout may increase the effective federal tax rate on income earned above the $500,000 modified adjusted gross income threshold because additional income may also reduce the available SALT deduction.
Exclusions and Special Rules
Pennsylvania does not have a pass-through entity tax system as of September 17, 2026. However, Pennsylvania allows an out-of-state credit for S corporation owners. As a result, Pennsylvania residents who own S corporations may benefit from pass-through entity tax elections made by the S corporation in other states.
Pass-through entity tax elections require detailed analysis because state compliance requirements and the treatment of the election may vary by state.
The following formula may be used to estimate the approximate federal benefit of a pass-through entity tax election:
Income apportioned to the state × State pass-through entity tax rate × Owner’s marginal federal tax rate
The enhanced SALT deduction may also affect the decision to itemize deductions. Taxpayers should compare the potential benefit of itemizing, including state and local taxes, mortgage interest, and charitable contributions, with the applicable standard deduction.
Documentation and Reporting
The article does not identify specific reporting requirements. Taxpayers and businesses should retain records supporting:
- Income apportioned to each state
- State income taxes paid at the entity level
- Pass-through entity tax elections made in each applicable state
- Owner credits or deductions related to entity-level tax payments
- State income tax payments and property tax payments
- Modified adjusted gross income calculations
- Itemized deduction calculations
Effective Dates
- As of September 17, 2026: Thirty-seven of the 41 states that impose personal income tax, plus New York City, have pass-through entity tax regimes. Pennsylvania does not have a pass-through entity tax regime as of that date.
- Tax year 2025: The SALT deduction cap increases from $10,000 to $40,000.
- Tax years 2026 through 2029: The SALT deduction cap gradually increases.
- Tax year 2030: The SALT deduction cap returns to $10,000.
Planning Considerations
Business owners should evaluate whether their entity is eligible to make a pass-through entity tax election in states where it earns income. Detailed modeling should be completed before making an election because compliance requirements and tax consequences can vary by state.
Owners should consider both the federal deduction available to the entity and the state-level treatment of entity tax payments. The deduction and credit methods may produce different results, even though each may provide a federal benefit.
Pennsylvania residents who own S corporations should evaluate elections available in other states. Although Pennsylvania does not have its own pass-through entity tax regime, its out-of-state credit for S corporation owners may allow those owners to benefit from another state’s election.
Individuals who may benefit from the increased SALT deduction cap should consider:
- Prepaying property taxes
- Making estimated state income tax payments in December rather than January
- Bundling personal property taxes, such as vehicle registration fees, if the following year is expected to be a high-income year
- Evaluating non-grantor trust structures for potential SALT deduction planning
- Reviewing residency before the 2030 reduction in the SALT cap
- Evaluating the effective tax rate on income earned above $500,000
- Comparing the benefit of itemizing deductions with the standard deduction
Taxpayers near the $500,000 modified adjusted gross income threshold should pay particular attention to the SALT deduction phaseout. For example, a married couple’s adjusted gross income increasing from $500,000 to $600,000 may result in an increase in taxable income of $130,000 because the couple’s allowable SALT deduction decreases from $40,000 to $10,000.
Example
Company X is a partnership owned by one Ohio resident and one Maryland resident. The partnership has $5 million of federal taxable income during 2025 and is eligible to make pass-through entity tax elections in the states in which it operates.
Assume that $2.5 million of the partnership’s income is apportioned to California, California’s pass-through entity tax rate is 9.3%, and an owner’s marginal federal income tax rate is 37%.
The approximate federal benefit of the election may be calculated as follows:
| Calculation | Amount |
| Income apportioned to California | $2,500,000 |
| California pass-through entity tax rate | 9.3% |
| Owner’s marginal federal tax rate | 37% |
| Approximate federal benefit | $86,025 |
This example illustrates the potential federal benefit of an election. However, taxpayers should complete detailed modeling before making an election because state compliance requirements and other tax considerations may affect the result.
Next Steps
- Identify states in which the business earns income and determine whether a pass-through entity tax election is available.
- Complete state-by-state modeling of available pass-through entity tax elections before making an election.
- Review projected modified adjusted gross income and the potential effect of the SALT deduction phaseout.
- Evaluate property tax, estimated state tax payment, itemization, residency, and trust-planning opportunities before applicable year-end deadlines.
For additional information about pass-through entity tax elections, SALT deduction planning, and multistate tax considerations, contact your RKL advisor.
Frequently Asked Questions
What is a pass-through entity tax election?
A pass-through entity tax election allows a qualifying pass-through entity to pay certain state income taxes at the entity level. The entity-level state tax payment may be deductible for federal purposes, which can reduce federal pass-through income and bypass the individual SALT deduction cap.
Which states have pass-through entity tax regimes?
As of September 17, 2026, 37 of the 41 states that impose personal income tax, plus New York City, have pass-through entity tax regimes. The availability and requirements of an election vary by state.
Does Pennsylvania have a pass-through entity tax election?
No. Pennsylvania does not have a pass-through entity tax system as of September 17, 2026. However, Pennsylvania allows an out-of-state credit for S corporation owners, which may allow Pennsylvania residents to benefit from an election made in another state.
What is the SALT deduction cap for 2025?
The SALT deduction cap is $40,000 for tax year 2025. The cap increases gradually through 2029 before returning to $10,000 in 2030.
How does the SALT deduction phaseout work?
For married taxpayers filing jointly, the enhanced deduction begins to phase out when modified adjusted gross income exceeds $500,000. The enhanced deduction is fully phased out when modified adjusted gross income exceeds $600,000, but the allowable deduction does not fall below $10,000.
