$40K SALT Deduction Sounds Great—But Is PTE Tax Still the Better Move?

Should You Still Elect Pass-Through Entity (PTE) Tax in Light of the New $40K Itemized Deduction?

The One Big Beautiful Bill (OBBB) Act made headlines by raising the itemized deduction cap for state and local taxes (SALT) to $40,000. But here’s the catch—it doesn’t apply to everyone.

So, if you're a business owner or high-income earner, you may be wondering:

"Should I still elect the PTE tax now that I can deduct up to $40K in SALT?"

Let’s break it down.

The New $40K SALT Deduction: Who Really Benefits?

Yes, the OBBB Act raises the SALT deduction cap from $10,000 to $40,000—but not across the board. Here's what you need to know:

• The $40K cap only applies to taxpayers under certain income thresholds 

• High earners are still limited to the old $10K cap - Phaseouts of the $40,000 limit begin when your adjusted gross income exceeds $500,000 for married filing joint and go back to $10,000 for adjusted gross income exceeding $600,000 for married filing joint taxpayers.

• The increased deduction doesn’t change the value for everyone—especially if you're already over the income threshold

So, if you're a higher-income business owner, you might not benefit from this bump at all.

What If You've Already Paid the PTE Tax?

We will address California - specific rules here. Each state has its own rules when it comes to PTE and if you are outside California, we recommend you lookup your state specific deadlines and rules for electing out.

In California, if your business made a PTE tax payment by June 15, you’re not locked in just yet. You still have flexibility:

• You can choose not to elect the PTE tax when filing your return even if you already made a payment (note that other states do not provide this option)

• This allows you to get a refund on the payment if it no longer makes financial sense

• However, this strategy should be evaluated with your tax advisor before acting

Why Would Someone Opt Out of the PTE Tax?

While the PTE tax is often used to bypass the SALT cap, it comes with a tradeoff:

• Paying tax at the entity level can reduce your Qualified Business Income (QBI) deduction

• That reduction could mean you end up paying more in taxes, even with the PTE election

• Itemizing your state taxes (SALT) deduction individually may offer better savings if:

  • You're already itemizing or very close to it and not already above $40,000 limit with other deductible state taxes

  • Your QBI deduction is significantly impacted by the entity-level tax

  • Your adjusted gross income is below $500,000 and your business is not considered a Specific Service Trade or Business (SSTB).  If your business is an SSTB, your QBI deduction starts phasing out in 2025 when taxable income exceeds $394,600 (MFJ) and $197,300 (S) and is eliminated when your taxable income reaches $494,600 (MFJ) and $247,300 (S). For these taxpayers, the QBI deduction is taken out of the equation.

This means the new deduction landscape might make individual payment + itemization more attractive for some but not all.  

What Should You Do Now?

The decision to elect or opt out of the PTE tax should be strategic, not automatic.

Before making your second California PTE payment or finalizing your return, consider:

1. Are you eligible for the $40K deduction?
2. Will paying at the entity level hurt your QBI deduction?
3. Are you already itemizing—or close to it?
4. Would electing out result in a refund and better tax position?

Talk to a Tax Advisor Before Year-End

Tax planning isn't one-size-fits-all—especially with these shifting rules. Before making your next PTE payment or filing your return, schedule a meeting with your tax advisor. They can run the numbers and help you decide what makes the most sense based on your specific situation.

Tax laws are changing—your strategy should too. Don’t leave money on the table. Book a year-end tax review on our booking calendar.

Find more highlights from the OBBBA at Major Tax Changes from the OBBBA: What You Need to Know for 2025