The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, contains provisions relating to pass-through entity taxes (PTETs) that are seen as favorable for taxpayers, especially investment management companies in the financial services world.
Key Takeaways:
- The OBBBA maintains PTET deductions and increases the SALT cap to $40,000 from 2025 to 2029.
- PTETs remain an effective strategy for bypassing SALT limitations in 36 states.
- High-net-worth individuals should consult tax advisors to evaluate PTET benefits under the new regulations.
While previous House and Senate bills would have limited the availability of PTET deductions, no such language was included in the OBBBA. Therefore, PTET deductions for specified service trades or businesses (SSTBs), such as accounting and law firms, as well as all trades or businesses that use the §199A deduction, remain deductible for federal income tax purposes. PTET payments made at the entity level continue to be deductible for federal income tax purposes, effectively bypassing the individual state and local tax (SALT) deduction limitation cap.
PTETs came into existence after the passage of the 2017 Tax Cuts and Jobs Act (TCJA), which implemented a $10,000 annual SALT cap for individuals.This means that taxpayers can only get a benefit for up to $10,000 for any state taxes paid in any given tax year. As a result, states, especially high-tax states, wanted to incentivize their large taxpaying residents to “stay home,” and so they implemented a workaround strategy.
The Internal Revenue Service in 2020 issued a notice blessing PTETs and allowed them to bypass the SALT cap. PTETs have now been enacted in 36 states. PTET is a tax on an entity classified as a partnership or an S corporation, under which the entity can elect to pay an entity-level tax in return for a deduction against the state tax imposed on the owners of the entity.
The $10,000 SALT cap was scheduled to sunset in 2025, but the OBBBA has extended it permanently. The OBBBA also increased the SALT cap to $40,000 annually ($20,000 for married couples filing separately) from the current $10,000 annual cap from 2025 through 2029. In addition, the SALT cap will increase to $40,400 in 2026 for inflation and will proceed at an increase of 1% annually until 2030, when it reverts to $10,000.
The SALT cap is phased down for taxpayers with a modified adjusted gross income over $500,000. Under this phase down, the $40,000 SALT cap is reduced by 30% of the excess of the modified gross income over the threshold amount, but not below $10,000.
The OBBBA is seen as a win by the financial services industry and those who have been taking advantage of PTETs in prior years. Taxpayers and advisors should evaluate whether the increased SALT cap reduces the relative benefit of PTET elections, especially when factoring in administrative costs and state-specific rules. The new $40,000 SALT cap most likely will not impact the benefits of PTET elections for most high-net-worth individuals; however, this should be analyzed with your tax advisor.
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For more information on this topic, please contact a member of Withum’s Financial Services Team.
