What Small Business Owners Get Wrong About the SALT Deduction After the OBBBA

The state and local tax (SALT) deduction has been one of the most debated provisions in tax law since the TCJA capped it at $10,000 in 2018. The One Big Beautiful Bill Act raised that cap to $40,400 for 2026, with income-based phase-downs for higher earners. For small business owners — especially those in states with income tax — this changes the math on itemizing, entity structure, and pass-through entity tax elections.

What Changed

Under the TCJA, the SALT deduction for individuals was capped at $10,000 ($5,000 for married filing separately). That cap covered state and local income taxes, property taxes, and sales taxes combined. For business owners in states like California, New York, New Jersey, and others with state income tax, this cap meant a significant portion of their state tax payments were non-deductible.

The OBBBA raised the cap to $40,000 for 2026, with future annual increases of 1% through 2029. The cap reverts to $10,000 beginning in 2030 unless further legislation extends it. There are also income-based phase-downs that reduce the benefit for higher earners.

How This Affects Business Owners

If you’re a sole proprietor or S-Corp shareholder who pays state income tax on your business earnings, the SALT cap directly affects how much of that state tax you can deduct on your federal return. With the cap at $40,000, many business owners who were previously limited will now be able to deduct more of their state and local taxes — which means lower federal taxable income.

This also affects the decision of whether to itemize. If your SALT plus other itemized deductions now exceed the standard deduction ($16,100 single / $32,200 MFJ for 2026), itemizing becomes more favorable.

The Pass-Through Entity Tax Election

Many states introduced pass-through entity (PTE) tax elections as a workaround to the $10,000 SALT cap. Under a PTE election, the entity pays state tax at the entity level instead of passing it through to the individual owners. The entity gets a deduction for the state tax paid, and the owners get a credit on their state return. This effectively moves state tax off the individual return and out from under the SALT cap.

With the cap now at $40,000, the PTE election may be less valuable for some business owners — but it’s still beneficial for those whose combined SALT exceeds the new cap. The interaction between the PTE election and the higher cap needs to be modeled for your specific situation. This is not a one-size-fits-all decision.

What to Do Now

If you’re in a state with income tax and your business generates meaningful income, review your SALT exposure under the new $40,000 cap. Determine whether itemizing now makes more sense than it did under the $10,000 cap. Evaluate whether a PTE election still provides additional benefit above the higher cap. And adjust your estimated tax payments if the deduction change affects your projected federal liability.

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If you want help modeling how the SALT changes affect your tax position, schedule a consultation or learn about our tax planning services.