Pass-Through Entity Tax and the SALT Cap: 2026 Owner Guide

The 2026 SALT cap is $40,400 and can fall to $10,000. A pass-through entity tax lets your S corp or partnership deduct state income tax outside that cap.

What is the SALT cap for 2026?

SALT means state and local taxes. If you itemize on Schedule A, you can deduct state and local income taxes (or sales taxes instead) plus property taxes, up to a combined cap. The 2025 tax law, Public Law 119-21, rewrote that cap in section 164(b) of the tax code.

For the 2026 tax year, the cap is $40,400, up from $40,000 for 2025. It shrinks by 30% of your modified adjusted gross income (MAGI) above $505,000, and it never drops below $10,000. The threshold is the same for single and joint filers. Married couples filing separately each get half the cap and start the phase-down at half the threshold.

The table applies the statute's formula to round incomes. The floor takes over a little above $606,000 of MAGI, and from there up the cap is $10,000, the same limit that applied from 2018 through 2024.

For 2026, once MAGI passes about $606,000, the Schedule A deduction for state and local tax stops at $10,000, however much state tax you pay.

The statute also sets the years ahead: the cap and threshold rise 1% a year for 2027 through 2029, and the cap returns to a flat $10,000 for tax years beginning after 2029. Congress can change any of that, so plan from the law as it stands each year.

Property taxes paid in carrying on a trade or business are outside the cap. State income tax on business profits that flow through to your personal return is inside it, and that is the tax a pass-through entity tax moves.

Modified adjusted gross income (MAGI)

For this cap, adjusted gross income plus certain excluded foreign earned income and U.S. possession income.

Pass-through entity tax (PTET)

A state income tax paid by a partnership or S corporation on its own income, in place of some or all of the tax its owners would pay individually.

Schedule K-1

The form showing each owner's share of a partnership's or S corporation's income and deductions.

How does a pass-through entity tax work with the SALT cap?

A number of states let a partnership or S corporation pay state income tax at the entity level. Depending on the state, the tax is required or elective.

IRS Notice 2020-75 sets the federal treatment. The business deducts the payment in computing its own income for the year it pays. Owners see it as lower business income on their K-1s rather than as a separate deduction, and it does not count toward any owner's SALT cap. That holds whether or not the tax came from an election, and whatever relief owners get on their state returns.

The election moves state income tax on business profits off your Schedule A, where the cap applies, and onto the business's return, where it does not.

Your state's rules then decide what you get back on your state return: a full or partial credit, a deduction, or an exclusion of the income the entity already paid tax on.

The notice covers partnerships and S corporations. If your business files as a sole proprietorship, the structure question comes first; our guide to S-Corp vs LLC taxation walks through it.

Did the 2025 tax law change this?

The 2025 law changed section 164 in two ways, new cap amounts and the income phase-down, and neither addresses taxes paid at the entity level. Notice 2020-75 says taxpayers may rely on it until proposed regulations are issued, and it remains the IRS's published guidance on these payments. Rules can change, so confirm current treatment with your CPA before electing.

Who benefits most from a pass-through entity tax election?

The larger 2026 cap shrank the group that gains. An owner with MAGI under $505,000 whose state income and property taxes fit under $40,400 can already deduct all of it on Schedule A.

The owners who gain the most sit at or near the $10,000 floor and pay meaningful state income tax on business profits.

For the 2026 tax year, the standard deduction is $32,200 for married couples filing jointly. If your itemized deductions don't top that, a Schedule A SALT deduction does nothing for you, but the entity-level deduction still works.

A hypothetical illustration

Assume a married couple's S corporation earns $900,000, nearly all their income, in one state with an assumed 5% income tax rate, so state income tax on that profit is $45,000. They also pay $15,000 of property tax on their home. Assume the state gives owners a full credit for tax the entity pays; not every state does. These numbers are illustrative only.

In this hypothetical, $45,000 that the cap would have limited becomes deductible at the entity level. The Schedule A amounts assume the couple itemizes in both cases and are shown before the 2025 law's overall reduction of itemized deductions for taxpayers in the 37% bracket (section 68). If they take the standard deduction, there is no separate Schedule A SALT deduction, but the entity-level deduction remains with the election. What it is worth depends on your bracket, your state's credit rules and the rest of your return.

How do pass-through entity tax rules differ by state?

Each state that offers the tax writes its own version. Indiana requires the business to elect every year, the election cannot be added by amending a return after the original is filed, and owners receive a credit for the tax the entity paid. Oklahoma's election stays in place until the business revokes it, and income taxed at the entity level is left out of the owners' Oklahoma taxable income.

Whether an election helps turns on your state's rules: the deadline, the owner credit and how owners who live elsewhere are treated.

Before your business elects anywhere, get answers to these:

• Is the tax elective or required in your state, and must the election be renewed each year?
• Is the deadline during the tax year or on a timely filed return?
• Are estimated payments due during the year?
• Do owners get a credit, a deduction or an exclusion on the state return?
• Will an owner's home state credit tax the entity paid to another state?
• How will the payment be shared among owners, and does your operating or shareholder agreement address it?

What year-end timing questions should you raise with your CPA?

Notice 2020-75 ties the federal deduction to the year the business makes the payment, so a payment made after year-end generally counts for the year it is made. That makes this a year-end item, alongside the moves in our guide to proactive tax planning.

The federal deduction follows the year the business pays, so the timing of the payment matters as much as the election itself.

Questions worth raising:

1. Has our state's 2026 election deadline passed?
2. Should the business pay before its tax year closes so the deduction lands in this tax year?
3. Is this a high-income year, such as a sale year, where the $10,000 floor applies? Our pre-exit tax checklist covers the rest of that picture.
4. How does the payment change my AGI, my SALT phase-down and other income-based items?
5. How does it affect my qualified business income deduction under section 199A?

Cap and threshold amounts change by year, so confirm the current figures before acting. Anchor provides tax strategy, planning and coordination, not tax filing or legal advice. The election, state filings and estimated payments belong with your CPA, and agreement questions with your attorney. Asking the question before the year closes is the gap between tax compliance and tax strategy, and our piece on coordinating your CPA, advisor and attorney covers the teamwork.

Frequently asked questions

What is the SALT cap for 2026?

For the 2026 tax year, the cap on itemized state and local tax deductions is $40,400. It is reduced by 30% of modified adjusted gross income above $505,000 and never falls below $10,000. Married couples filing separately each get half.

Does the pass-through entity tax still work after the 2025 tax law?

The 2025 law changed the individual cap in section 164, and its amendments do not address taxes paid at the entity level. The IRS's published guidance on those payments is Notice 2020-75, which taxpayers may rely on until proposed regulations are issued. Rules can change, so confirm current treatment with your CPA.

Can a sole proprietor use a pass-through entity tax?

Notice 2020-75 covers partnerships and S corporations, and a sole proprietorship is neither. If your business files as a sole proprietorship, the entity question comes first.

Do I have to itemize to benefit?

No. The business deducts the payment before its income reaches your return, so your K-1 shows less income whether you itemize or take the standard deduction.

When is the SALT cap scheduled to return to $10,000?

Under the statute as written today, the cap rises 1% a year for 2027 through 2029 and returns to a flat $10,000 for tax years beginning after 2029. Congress can change that schedule.

Sources

1. 26 U.S. Code § 164, Taxes (Cornell Legal Information Institute), the cap, threshold, phase-down, floor, MAGI and business exception.
2. IRS Topic No. 503, Deductible taxes, the itemized SALT deduction on Schedule A and its limit.
3. IRS Notice 2020-75, Internal Revenue Bulletin 2020-49, the entity-level deduction and its timing.
4. 26 U.S. Code § 68, Overall limitation on itemized deductions (Cornell Legal Information Institute), the itemized deduction reduction for the 37% bracket.
5. IRS tax inflation adjustments for tax year 2026, the 2026 standard deduction.
6. Indiana Department of Revenue, Pass Through Entity Tax FAQ, Indiana's annual election and owner credit.
7. Oklahoma Tax Commission, Form 586, Oklahoma's election and owner treatment.