Now that the SALT deduction cap is increasing to $40,000, there’s a powerful two-part strategy for small business owners in high-tax states like California:
Strategy: Maximize the SALT deduction at both the entity and personal level.
Elect PTE (Pass-Through Entity) Tax
If you’re an S-Corp or partnership in California, opt into the PTE tax — it allows your business to deduct state income taxes at the entity level (above the cap). This reduces federal taxable income without impacting your $40K SALT cap.
Stack Personal Property Taxes on Schedule A
With the higher SALT cap, you can now also deduct up to $40,000 (subject to phaseout) of personal state income and property taxes on your Schedule A. That’s on top of your PTE deduction.
Example:
Your CA S-Corp elects into the PTE and pays $30,000 in California tax — fully deductible by the S-Corp.
Separately, you pay $20,000 in property tax personally.
Under the new rules, you could deduct the full $20K on your Schedule A (if income is under the phaseout threshold), giving you $50K+ of SALT deductions across both buckets.
Planning Insight:
PTE is a must-do for high earners. But you’ll also want to time state estimated tax payments and property tax bills to hit the deduction in the right year, especially as the cap phases out for incomes over $500K.