PTET Election Under The OBBBA
By As discussed in New North Carolina PTE Tax Can Reduce Federal Income Taxes (December 14, 2022), the pass-through entity tax (the “PTET”) elections enacted by states and blessed by the IRS in Notice 2020-75 provides a workaround to the 2017 Tax Act’s $10,000 limit on the deductibility of state and local taxes (the “Salt Cap”) for taxpayers who operate a business via a pass-through entity. The One Big Beautiful Bill Act (the “OBBBA”) enacted on July 4, 2025, expanded the Salt Cap from $10,000 to $40,400 (as adjusted for 2026). The expanded Salt Cap, however, is subject to phase down based on income and reverts to $10,000 in 2030.
The phase down for the expanded Salt Cap for married filing jointly taxpayers reduces the cap by 30% of income above $505,000, with the cap fully phased down to $10,000 for married filing jointly taxpayers with $606,333 of modified adjusted gross income (adjusted for 2026). For example, a married couple with $420,400 of modified adjusted gross income has the $40,400 cap reduced by 30% of the $20,000 excess ($6,000), leaving a $34,400 limit. Married filing jointly taxpayers with $606,333 of modified adjusted gross income have a reduction in the Salt Cap to $10,000, the original Salt Cap in the 2017 Tax Act. Thus, many high-income taxpayers who operate a pass-through entity can still obtain significant income tax savings by electing into the PTET for the state where they reside or the entity operates.
The OBBBA sets the expanded Salt Cap to expire for 2030. Unless there is legislative action, a flat $10,000 Salt Cap will return in 2030, making the PTET elections as important then as prior to the OBBBA.