The landscape for pass-through entities—such as LLCs, partnerships, and S corporations—has been significantly influenced by recent legislative changes. The recently enacted “One Big Beautiful Bill Act” (OBBBA) has maintained and clarified the federal deductibility of Pass-Through Entity Taxes (PTET), a vital tool for business owners in high-tax states.
What’s Changed?
- PTET Deductibility Preserved: Pass-through entities can still pay state income taxes at the entity level and fully deduct these payments for federal tax purposes. This helps business owners avoid the individual State and Local Tax (SALT) deduction cap, which has been increased to $40,000 for most taxpayers but still phases out for higher-income filers.
- No Federal Limitation on PTET: Earlier proposals to restrict or eliminate PTET deductions for Specified Service Trades or Businesses (SSTBs) were removed from the final legislation. Qualifying pass-through entities still have access to this deduction.
- QBI Deduction: The 20% Qualified Business Income (QBI) deduction for pass-through owners is now a permanent fixture, providing a solid foundation for tax planning and helping to keep effective tax rates competitive with those of C corporations. There is pending legislation that could increase this to 23%, likely to take effect starting in 2026.
Why Does This Matter?
- Tax Efficiency: PTET regimes remain a powerful workaround for the SALT cap, especially in over 30 states that have adopted such laws. This is a significant victory for real estate partnerships, professional firms, and other pass-through businesses that face high state tax burdens.
- Planning Flexibility: With the QBI deduction and PTET deductibility secured, business owners can confidently structure operations and compensation to maximize after-tax income.
- State-by-State Nuances: Each state’s PTET rules differ, so it’s essential to coordinate with your tax advisor to ensure compliance and optimize benefits.
Questions for Reflection:
- How are you leveraging PTET in your current tax strategy?
- Are you prepared for the new SALT cap phaseouts if your income exceeds the threshold?
- Have you reviewed your entity structure in light of these permanent changes?
If you’d like to discuss how these updates may impact your business or personal tax strategy, please contact your Farther advisor or contact us directly to find an advisor. Let’s ensure you’re positioned to take full advantage of the latest tax law changes.
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