Is the pass-through entity tax still worth it after the 2025 SALT cap increase?

Yes, for most owners whose state tax exceeds the cap. The $40,000 cap ($40,400 for 2026) phases down by 30 cents per dollar of MAGI over $500,000 ($505,000 in 2026) to a $10,000 floor, so a high earner is effectively still capped at $10,000. The pass-through entity tax deduction sits at the entity level under IRS Notice 2020-75 and is not subject to the §164(b)(6) cap, so it deducts every dollar of state income tax the entity pays.

At what income does the $40,000 SALT cap drop to $10,000?

For 2026, the $40,400 cap loses 30 cents per dollar of MAGI above $505,000 and bottoms out at the $10,000 floor once MAGI reaches about $606,333. For 2025 the $40,000 cap reaches $10,000 at $600,000 of MAGI. Above those points a taxpayer is back to the same $10,000 cap that existed under the Tax Cuts and Jobs Act, which is why the entity-level workaround still matters for high earners.

Do I claim both a federal deduction and a state credit for the pass-through entity tax?

Yes, and that is the point of the structure. The entity deducts the state tax payment federally under IRS Notice 2020-75, lowering the ordinary income reported on the owner's Schedule K-1, and the owner separately claims a nonrefundable state credit for the tax the entity paid. The income is taxed once by the state, and the federal deduction is preserved in full, outside the §164(b)(6) cap.

When is the Utah SALT report election due, and can it be reversed?

The electing entity must pay the tax on or before the last day of its taxable year, December 31 for a calendar-year filer, and file Form TC-75 electronically through Taxpayer Access Point. Once a valid payment is made, the election is irrevocable for that year under Utah law and cannot be reduced or refunded. The decision has to be made before year end, not at the time the return is filed.

Does electing the pass-through entity tax lower my section 199A QBI deduction?

Slightly. Qualified business income under §199A is computed after the entity-level state tax deduction, so paying the tax reduces QBI by that amount and trims the 20% deduction by 20% of the tax. For most high earners the federal benefit of deducting the full state income tax outside the $10,000 effective cap still far exceeds the small QBI reduction.

The Journal / Business Tax

The Pass-Through Entity Tax After the SALT Cap Increase: Why the Election Still Beats the $40,000 Deduction.

By Ewan Morkel, EAJune 15, 20267 min read

OBBBA raised the SALT deduction cap to $40,000, then phases it down to $10,000 for incomes over $500,000. For a business owner who pays more than that in state tax, the pass-through entity tax election still deducts every dollar at the entity level, above the cap and outside the phaseout. Here is the 2026 math.

A Utah business owner runs a profitable S corporation, draws a reasonable salary, and watches close to a million dollars of business income land on the joint return every year. When the federal cap on state and local tax deductions jumped from $10,000 to $40,000, the question I heard most was whether the pass-through entity tax after the SALT cap increase is still worth electing, or whether the bigger cap finally made it unnecessary. For a high earner in a state with an income tax, the answer is that the election still wins, and the gap is wider than the new cap suggests.

The One Big Beautiful Bill Act, signed July 4, 2025, raised the §164(b)(6) cap to $40,000 for 2025 and $40,400 for 2026, with 1% annual bumps through 2029 before it snaps back to $10,000 in 2030. It also added a phasedown: the cap drops by 30 cents for every dollar of modified adjusted gross income above $500,000 in 2025, or $505,000 in 2026, and it cannot fall below $10,000. The headline number is $40,000. The number that actually applies to a business owner earning seven figures is $10,000.

The phasedown

Why the pass-through entity tax after the SALT cap increase still wins.

Run the phasedown to its end. In 2026 the $40,400 cap has $30,400 of room above the $10,000 floor, and at 30 cents per dollar that room is gone once MAGI clears $606,333. Above that line, a married couple is right back to the $10,000 cap that drove every PTET election since 2018. The owner of a business that pays $45,000 of state income tax gets to deduct $10,000 of combined income and property tax on Schedule A and eats the rest. That is the same wall the cap built in the first place, just moved up the income scale.

The mechanic

The election moves the deduction above the cap entirely.

The pass-through entity tax does not enlarge the cap. It steps around it. The S corporation or partnership elects to pay the state income tax at the entity level, and under IRS Notice 2020-75 that payment is a 'specified income tax payment' deductible by the entity in computing its non-separately-stated income. The deduction reduces the ordinary business income on the owner's Schedule K-1 before it ever reaches the 1040, so it never touches the §164(b)(6) cap and never enters the phasedown. The owner then claims a state credit for the tax the entity paid, so the state is made whole and the income is not taxed twice. The IRS blessed the structure in 2020, and OBBBA left it alone. An earlier House draft would have curbed the workaround for service businesses, but that provision did not survive into the final law.

Worked example: a married couple, sole owners of a Utah S corp with $1,000,000 of business income.

Utah S corp active business income (2026): $1,000,000
Owners' modified AGI, married filing jointly: $1,060,000
Utah SALT report rate (the §59-10-104 individual rate): 4.5%
Utah tax paid at the entity level: $45,000
2026 SALT cap before phasedown: $40,400
Personal SALT cap after the 30% phasedown over $505,000: $10,000 (floor)
Home property tax already fills the $10,000 floor, so income-tax deduction personally: $0
Federal deduction for the $45,000 with the election (entity level, uncapped): $45,000
Federal tax saved at the 37% bracket: ≈ $16,650
Out-of-pocket cost of the election (Utah credit offsets it): $0

Tax year 2026, married filing jointly, sole owners. Assumes a 37% federal marginal bracket, MAGI above the $606,333 point where the SALT phasedown reaches the $10,000 floor, and home property tax of at least $10,000 that already absorbs the personal cap. The Utah SALT report rate equals the 4.5% individual income tax rate H.B. 106 set beginning in tax year 2025. Ignores NIIT; the §199A deduction is computed on income net of the PTET, a minor offset discussed below.

The $16,650 is found money. The couple pays Utah the same $45,000 either way. The only thing that changes is whether the federal government recognizes the deduction, and the election is what makes it recognize all of it instead of none of it. The bigger the state tax bill and the higher the MAGI, the more the election is worth, which is exactly backwards from how the new cap was sold.

Utah mechanics

How the Utah SALT report election actually works.

Utah calls its version the SALT report. A partnership or S corporation makes the election by paying the tax and filing Form TC-75 electronically through Taxpayer Access Point, and the tax is imposed at the individual income tax rate under §59-10-104, which H.B. 106 set at 4.5% beginning in tax year 2025. The election is annual and, once a valid payment is made, irrevocable for that year, so it cannot be reduced or refunded later. The payment has to be made on or before the last day of the entity's taxable year, which for a calendar-year S corp means December 31. The owner picks up a nonrefundable credit on the Utah return under Utah Code §59-10-1403.2 for the tax paid on their share, and the federal deduction flows automatically through the lower K-1 income.

The fine print

When the election is the wrong move.

The election is not free of friction. The credit is nonrefundable, so an owner whose Utah liability is smaller than the credit, because of other credits or a low-income year, can lose part of it. The payment is due by year end, a real cash-flow demand on a December 31 deadline. Owners who are nonresidents of Utah may or may not get a credit in their home state for the Utah entity tax, depending on that state's rules, and a mismatch can leave income taxed twice. The entity-level deduction also shrinks the §199A qualified business income base, because QBI is figured after the state tax deduction, trimming the 20% deduction by 20% of the tax paid. None of these usually outweighs a five-figure federal deduction, but they are why the election is a yearly decision and not a set-and-forget.

The election sits alongside the other moves a profitable S corporation should run each year. If you own the building your company operates in, the self-rental rule for S corp owners decides whether the rent is a help or a trap, and the Augusta rule for S corp owners pulls up to 14 days of home-meeting rent out of taxable income entirely. The pass-through entity tax election carries the largest dollar figure for most owners, and it is the easiest to forget until the December 31 deadline has already passed.