SALT Deduction Reforms: Big Impact on US Businesses

The SALT deduction reforms are once again at the center of America’s tax policy conversation. Whether you’re a large C-corporation or a small pass-through business, recent discussions and proposals around the State and Local Tax (SALT) deduction cap could significantly influence how your business is taxed—and how much of your revenue you get to keep.

In this article, we’ll break down what the SALT deduction is, what the latest reforms propose, how they impact both C-corporations and pass-through businesses, and what business owners should be thinking about right now.

What Is the SALT Deduction?

The SALT deduction lets taxpayers deduct certain taxes paid to state and local governments from their federal taxable income. These include:

• State income taxes
• Local income taxes
• Property taxes
• Sales taxes (in some cases)

Historically, this deduction was uncapped, which meant taxpayers—especially those in high-tax states like New York, California, and New Jersey—could reduce their federal tax bills substantially. But all of that changed with the Tax Cuts and Jobs Act (TCJA) of 2017.

The 2017 SALT Cap: A Quick Recap

Under the TCJA, the SALT deduction was capped at $10,000 per year for individuals and pass-through entities. This cap does not apply to C-corporations.

This cap sparked major backlash, particularly from high-tax states. It disproportionately affected small business owners, especially those operating as pass-through entities such as LLCs, S corporations, and partnerships. In contrast, C-corporations continued to deduct state and local taxes without restriction.

The cap was intended to be temporary, set to expire in 2025, but discussions about reform or repeal have gained steam—especially with the political back-and-forth around tax fairness and state budgets.

What Are SALT Deduction Reforms?

SALT deduction reforms refer to proposals aimed at either lifting, modifying, or making permanent the $10,000 cap. The reforms have sparked debate across Congress, with states pushing for more flexibility and federal lawmakers debating the fiscal consequences of expanding deductions.

Some of the most notable proposals include:

• Raising the cap (e.g., from $10,000 to $20,000 or $30,000)
• Repealing the cap entirely
• Allowing pass-through businesses to bypass the cap through workaround legislation

How Do These Reforms Affect C-Corporations?

Interestingly, C-corporations were never subject to the $10,000 SALT cap. They have always been able to deduct state and local taxes as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code.

However, SALT deduction reforms could still indirectly affect C-corporations in the following ways:

1. Competitive Disadvantage

If pass-through businesses regain more generous deductions, C-corporations could lose one of their comparative tax advantages. This might push more businesses to consider converting back to pass-through structures.

2. Legislative Spillovers

Broader tax reform tied to SALT deductions could lead to corporate tax rate adjustments, especially if Congress looks to offset any revenue loss from lifting the cap.

3. State Tax Shifts

If states expect more deductibility at the federal level, they might increase state taxes, assuming that more of that burden will be absorbed by federal deductions. This could lead to higher state tax bills for all businesses—including C-corporations.

SALT Deduction Reforms and Pass-Through Businesses

Pass-through businesses—like S corporations, LLCs, and sole proprietorships—are taxed on the individual income tax level, not as separate corporate entities. This means they are directly affected by the $10,000 cap.

Many states have created workaround laws to help these businesses deduct more than the cap. Here’s how SALT deduction reforms could impact them:

1. Greater Tax Relief

If the cap is repealed or raised, small business owners could reduce their federal tax burden significantly—especially in states with high income and property taxes.

2. More Simplicity

Workarounds like pass-through entity (PTE) taxes have helped, but they create administrative complexity. A federal-level fix could streamline tax filings and planning.

3. Business Structure Decisions

Currently, some businesses have considered converting to C-corporation status to sidestep the SALT cap. If the cap is repealed, we could see a reversal in that trend, with businesses opting for pass-through status once again.

State-Level Workarounds: What’s Already Happening?

To help businesses dodge the SALT cap, over 30 states have adopted PTE tax workaround laws. These laws allow pass-through entities to pay state taxes at the entity level (where the SALT cap doesn’t apply), instead of passing them through to owners who would hit the $10,000 limit.

This workaround has been approved by the IRS, giving it more credibility and momentum.

However, these rules vary by state and are not available everywhere. That’s why federal-level reforms remain critical for creating a level playing field.

Political Landscape: Where Do Things Stand?

The SALT deduction has become a hot political issue:

• Democrats from high-tax states (like New York and California) are pushing to repeal or raise the cap.
• Fiscal conservatives argue that lifting the cap would disproportionately benefit high-income taxpayers, potentially making the tax system less progressive.
• President Biden has signaled openness to reform but has not made it a top priority—though it may gain momentum as the 2025 expiration date approaches.

So far, no major changes have passed, but multiple bills have been introduced. The coming presidential election and shifting congressional dynamics will likely determine what happens next.

Key Considerations for Business Owners

Whether you run a C-corporation or a pass-through entity, here are some things to keep in mind as SALT deduction reforms evolve:

Talk to a Tax Professional

Work with a CPA or tax attorney to understand how current SALT laws and proposed changes may affect your business.

Watch for Legislative Changes

The 2025 expiration of the current SALT cap will likely bring major changes. Stay informed to adapt your strategy ahead of time.

Reevaluate Your Business Structure

If reforms favor pass-through entities, you may want to switch from C-corp to pass-through—or vice versa—depending on what delivers the best tax benefit.

Use Available Workarounds

If you’re in a state that offers a PTE tax election, take advantage of it to bypass the SALT cap. This can reduce your federal tax liability right now, even before reforms are passed.

Pros and Cons of SALT Deduction Reforms

Here’s a quick look at how the reforms could benefit or burden different groups:

Final Thoughts: What Comes Next?

The debate over SALT deduction reforms is far from over. As we approach 2025—the year when the TCJA SALT cap expires—businesses need to stay sharp, agile, and well-informed.

Pass-through businesses have the most to gain if reforms expand or repeal the SALT deduction cap. Meanwhile, C-corporations should watch for ripple effects that could impact their competitive positioning and state tax exposure.

Ultimately, the key for all business owners is to stay ahead of tax law changes and be ready to adjust your business structure or tax strategy to maximize savings and stay compliant.

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