What is the SALT cap?

The SALT cap is the $10,000 limit on the federal itemized deduction for state and local taxes — income, sales, and property taxes combined. Enacted by the 2017 Tax Cuts and Jobs Act, it sharply reduced the deduction for taxpayers in higher-tax states and for business owners with substantial state income-tax bills.

How does the pass-through entity tax workaround work?

Instead of the owners paying state income tax individually (where it's capped at $10,000), the pass-through business itself elects to pay a state-level entity tax. That tax is a business expense the entity deducts on its federal return before income flows through to the owners — so it isn't subject to the individual SALT cap. Owners typically receive a state credit for their share.

Which states allow a pass-through entity tax?

Roughly three dozen states with an income tax have enacted a PTET, though the details — election timing, rate, credit mechanics, and whether it's annual or binding — differ significantly by state. States with no income tax, like Florida, have no PTET because there is no state income tax to work around.

Did the IRS approve the PTET workaround?

Yes. In Notice 2020-75, the IRS confirmed that a state income tax imposed on and paid by a pass-through entity is deductible by the entity in computing its non-separately-stated income — validating the core mechanism the state PTET regimes rely on.

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State & Local Tax (SALT)

The SALT Cap Workaround: How Pass-Through Entity Tax Restores Your Deduction

The $10,000 SALT cap gutted the state-tax deduction for pass-through owners. Roughly three dozen states now let the business pay the tax and deduct it federally — legally sidestepping the cap. Here's how the PTET election works.

SMAART Tax Team

March 9, 2026

6 min read

|Reviewed by Lisa Terrell, Enrolled Agent