Changes to the SALT Cap and PTE Elections Coming in 2025
The 2017 Tax Cuts and Jobs Act (TCJA) imposed a $10,000 “cap” on state and local tax (SALT) deductions on individual federal income tax returns for tax years 2018 through 2025. The SALT cap is set to expire December 31, 2025. The issue of whether to repeal and eliminate the cap or simply increase the cap has been a constant debate over the past few years. Depending on who controls the White House and Congress in 2025 may determine what eventually happens to the SALT cap.
In response to the SALT cap enactment in 2017, state legislatures rose to the occasion by enacting SALT cap “workarounds.” These “workarounds” have become known as “pass-through entity tax elections” or “PTE” or “PTET” elections. Currently, 36 states have PTE elections which allow owners of pass-through entities to elect for the pass-through entity (i.e., partnership or S corporation) to pay income tax at the entity level. By allowing the PTE to pay tax at the entity level, the PTE is able to take a federal tax deduction for 100% of the state income tax paid on its federal income tax return. Thus, when the PTE issues its K-1s to is partners or shareholders, federal taxable income has already been decreased by state taxes paid resulting in the partner or shareholder paying less individual tax. The partner or shareholder does not have to worry about the $10,000 SALT cap.
10 of the 36 states that have PTE tax workarounds are set to expire at the end of 2025 when the SALT cap expires at the federal level. Those states include: California, Colorado, Iowa, Illinois, Massachusetts, Michigan, Minnesota, Oregon, Utah and Virginia. Thus, these state legislatures will be forced to act before the end of 2025 to either conform to any change in federal tax legislation or extend their own state legislation. The other 26 states where the PTE tax workarounds don’t expire will not be forced to make changes if the current SALT cap is simply extended.
So What?
The debates over the SALT cap have come and gone over the past few years, and no changes have been made to the cap. However, the expiration date of the SALT cap will force Congress to act and cause a ripple effect among the states. Consequently, any changes to the cap or repeal of the cap will likely force taxpayers to make changes to their state PTE elections and/or consider changing how the ownership of their business is structured prior to 2026. All PTE owners should monitor this issue and consult a qualified tax professional before making any changes.
Contributors
Brian Strahle, Tax Partner & National SALT Practice Leader | brian.strahle@frazierdeeter.com
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