Diving Deeper Into the One Big Beautiful Bill

PUBLISHED SEPTEMBER 2025

The One Big Beautiful Bill Act signed into law by President Trump in July, significantly raises the state and local deduction cap in 2025 through 2029 while maintaining the valuable tax planning advantage for business owners who pay state taxes through pass-through entities, known respectively as SALT and PTET. The measure preserves a key mechanism to maximize state tax deductions at the entity level. Consider leveraging these expanded opportunities for tax planning. 

For those who pay state and local taxes, the $10,000 SALT deduction limitation, enacted in 2017 as part of the Tax Cuts and Jobs Act, has been a major concern. Starting in 2018, the SALT deduction was capped at $10,000 annually for most eligible taxpayers, which significantly impacted those with higher state income or real estate taxes. The limit was scheduled to expire after 2025, returning to an unlimited SALT deduction for regular tax purposes.  

On July 4, the measure was enacted, raising the SALT deduction limitation to $40,000 for most taxpayers in 2025. This limit will increase by 1 percent annually through 2029 before reverting to $10,000 in 2030. This will allow more people to itemize deductions rather than using the standard deduction, particularly if the non-SALT itemized deductions, such as mortgage interest and charitable contributions, are substantial.

Taxpayers with Modified Adjusted Gross Income below $500,000 ($250,000 for married filing separately) may deduct up to $40,000 ($20,000 if married filing separately) of their state and local income taxes, real estate taxes, and personal property taxes. Once income exceeds these income limits, the $40,000 ($20,000 if married filing separately) limit is phased down, meaning it is reduced by 30 cents for every dollar of income above the threshold.  

How It Will Apply

For example, if your income is $520,000, you are $20,000 over the threshold, and your SALT deduction limit is reduced by $6,000 (30 percent of $20,000), leaving up to $34,000 as a potential deduction. This phase-down continues until the deduction limit reaches a minimum of $10,000 at $600,000 ($300,000 for married filing separately) of income. The deduction limit cannot be reduced below $10,000, regardless of income level.  

Note: Under the Alternative Minimum Tax rules, SALT deductions are generally not allowed, so taxpayers cannot claim these deductions to reduce their AMT liability, regardless of the higher SALT deduction limit under the new law. 

For those business owners of pass-through entities (partnerships and S corporations), the Pass Through Entity Tax survives. Contrary to some expectations, the new law did not eliminate this strategy for payment of state income taxes. In many states, business owners in pass-throughs can elect for the entity to pay state and local income tax at the entity level. These taxes are deductible by the entity for federal tax purposes and reduce the flow-through income taxed to the business owner personally. This treatment allows the effective deduction of state and local taxes without being subject to the federal SALT limitations, saving the owner significant federal tax.  

For example, an S corporation manufacturing company has $2 million of pre-tax income, located in Kansas, elects to pay the Kansas PTET at 5.7 percent, resulting in $114,000 in Kansas tax at the entity level. The business owner is then taxed federally on only $1,886,000, not $2 million. The $114,000 is not counted as SALT for the individual’s itemized deduction. It is deducted by the business, reducing taxable income for the owner, who, in this example, is at the top marginal federal rate of 37 percent, resulting in $42,180 federal savings on this amount.  

Additionally, the business owner may still deduct up to $10,000 of other SALT, such as real estate tax, personal property tax, or state income tax on other income if itemizing deductions.

What It All Means

In summary, the new law brings sweeping changes to the SALT deduction landscape while preserving key planning opportunities for business owners through the PTET.

Taxpayers should review their potential itemized deductions in light of the expanded cap and new phase-down rules, as well as consult with a qualified adviser about maximizing federal tax benefits through available state-level elections. 

With increased flexibility and continued opportunities for strategic tax planning, these changes present a valuable opportunity to revisit your tax approach for 2025 and beyond.