Salt Deduction 2025 - Changes for Business Owners

Major Deduction Changes Are Coming — Here’s What It Means for Business Owners

There’s a big shift coming to the U.S. tax landscape that many business owners may not be fully aware of yet, and it could mean thousands of dollars in tax savings or, for some, new limitations. The new proposal increases the SALT (State and Local Tax) deduction cap from $10,000 to $40,000 starting in 2025, with a gradual phase-out for high earners. While this might sound like a win for individuals, it also has significant implications for businesses, particularly those structured as pass-through entities.

Since 2017, taxpayers have only been able to deduct up to $10,000 in state and local taxes from their federal returns,  a hard cap that hit high-tax states the hardest and triggered workarounds for many business owners.

Under the proposed changes, that cap will rise to $40,000 (or $20,000 if married filing separately). However, there’s a catch: for individuals with high incomes, particularly those earning over $500,000 in modified adjusted gross income (MAGI), the deduction begins to phase out, eventually dropping back down to the original $10,000 limit for the wealthiest.

That means if you’re a high earner, the benefits of this increase could shrink quickly or disappear altogether.

This isn’t just an individual tax change. Business owners, especially those operating as pass-through entities like LLCs, S corporations, and partnerships, need to pay close attention.

Why?

Because many businesses have been using a clever workaround. Instead of having owners pay state income taxes personally and hitting the $10,000 limit, some states allow the business itself to pay the taxes at the entity level. This means the full tax amount becomes deductible as a business expense, bypassing the SALT cap altogether.

Here’s where the proposed changes shake things up: certain business types, particularly service-based businesses like law firms, medical practices, consultants, and financial advisors, referred to as “specified service trades or businesses” (SSTBs), may now lose the ability to use this workaround.

If you’re in one of these industries, your state and local tax deduction may now be limited to the personal $40,000 cap, subject to phase-out based on your income. That could mean a significant tax increase compared to what you’re currently deducting through entity-level payments.

• C Corporations: No change. They’ve always been able to deduct SALT payments at the corporate level.
• Pass-Throughs (Non-Service): Can likely continue using the entity-level deduction. This structure remains advantageous.
• SSTBs (Service Providers): May lose the entity-level deduction option and fall under the individual $40k cap — or less, depending on income.

If you’re a business owner using a pass-through structure, this change may require you to rethink your tax planning strategy.

Ask yourself: - Will my business still qualify to deduct SALT at the entity level? - Is my income high enough to trigger the phase-out? - Should I consider restructuring my entity or changing how I pay taxes? - Am I maximizing other deductions or strategies that offset this change?

These questions are especially urgent for professional service firms, who may be hit hardest by the new limits.

Tax deductions aren’t just about numbers. They directly impact your net income, your cash flow, and how you invest in your business. For many small business owners, especially in high-tax states, the ability to deduct tens of thousands more in state and local taxes could make the difference between a lean year and a profitable one.

On the flip side, if your business loses the ability to deduct these expenses due to the new restrictions, your effective tax rate could increase, even if your revenue stays the same.

Understanding these rules now gives you time to respond, rather than react.

While this SALT deduction change might look like a win on paper, the reality is more nuanced, especially for business owners. For some, it means new savings. For others, especially high earners in service-based industries, it may mean losing a valuable deduction and needing to pivot quickly.

If your business relies on entity-level SALT deductions, or if you’re unsure how this will impact you, planning ahead could save you thousands in unexpected liability.

Call us today at (720) 878-2280 and get a free consultation to see how this may affect you.Call Now For A Free Consultation – 720.878.2280

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