Posted in Blog
By Tony Liu, Founder and Principal Business Trial Attorney
In Summary:
California business owners just got a surprise gift from Congress. The State and Local Tax (SALT) deduction cap has been temporarily increased to $40,000 under the One Big Beautiful Bill Act signed on July 4, 2025. This is a significant shift from the previous $10,000 cap and presents a rare window for high-earning pass-through entities to lower federal tax liability. If leveraged properly, this change could save business owners in high-tax states like California tens of thousands annually, but only through 2027.
The Underestimated Power of the SALT Cap Increase
When tax headlines broke on July 4th, most people missed the fine print. But for those running high-revenue pass-through entities in California, the increase in the SALT cap from $10,000 to $40,000 may quietly be the most powerful financial planning opportunity in years.
What Is the SALT Deduction Cap—And Why $40K Matters
What Is the SALT Deduction Cap?
The SALT deduction allows taxpayers to deduct certain state and local taxes, like property taxes and state income taxes, from their federal taxable income. In 2017, the Tax Cuts and Jobs Act capped this deduction at $10,000, a move that disproportionately affected residents and business owners in high-tax states like California and New York.
Why High-Earning Business Owners Felt the Pinch
In states where the top income tax rate exceeds 13%, many successful business owners saw their federal tax burden rise sharply after the SALT cap was introduced. Add in California’s steep property taxes and the cap meant tens of thousands in potential deductions were off-limits.
What Changed in 2025?
The new legislation—The One Big Beautiful Bill Act—temporarily increases the SALT deduction cap to $40,000 from 2025 through 2027. It’s not permanent, and there’s no guarantee of renewal. That means tax planning decisions made over the next 30 months could have multi-year consequences.
Who Qualifies—And Who Benefits Most
Pass-Through Entities Reap the Rewards
This increase primarily benefits pass-through entities like S Corps, LLCs, and partnerships. These businesses don’t pay income taxes at the corporate level; instead, income flows through to individual owners, who pay taxes on their personal returns. That’s where the SALT cap comes into play.
The High-Earner Advantage
If you’re earning $500K+ annually, this change is especially important. Here’s a quick example:
- Annual CA state tax liability: $60,000
- Annual property tax: $18,000
- Previously deductible (under $10K cap): $10,000
- Now deductible (under $40K cap): $40,000
- Net additional deductions: $30,000
- Federal tax savings at 37%: $11,100
Multiply that across three years and you could pocket over $33,000, simply by planning strategically.
Strategic Moves to Maximize the SALT Cap $40,000
Reevaluate Your Business Entity Structure
If you’re currently operating as a C Corp, it may be worth discussing whether a switch to a pass-through structure like an S Corp would unlock this deduction. Tax consequences vary, but in certain cases, entity restructuring could mean a six-figure swing in net income over the next three years.
Bunch SALT Payments Strategically
If your deductions typically hover around the cap, bunching payments—i.e., paying next year’s property tax in December—could help you exceed the threshold in alternating years, maximizing your deduction during peak earning periods.
Take Action Before the Clock Runs Out
This cap increase ends in 2027. If your business is experiencing a strong revenue year, now’s the time to align with your CPA or tax attorney. You may be able to restructure contracts, accelerate revenue recognition, or defer expenses in a way that stacks the deck in your favor.
Real-World Use Case: $18,000 Saved with One Adjustment
Let’s consider a California-based LLC with $1.2M in income and $80,000 in combined state and local taxes. Under the old $10K cap, they lost $70K in deductions. With the $40K cap in place, they now recover $30K in deductions annually, saving over $11,000 per year in federal taxes. Across three years, that’s over $33,000—which could fund a new hire, expand marketing efforts, or pay down debt.
Important Considerations and Potential Pitfalls
IRS Scrutiny on Workarounds
The IRS has been scrutinizing SALT cap workarounds, like elective PTE taxes and state credit offsets. While the new law offers clarity, any aggressive maneuvering should be backed by legal advice and bulletproof documentation.
According to a Tax Foundation’s analysis, workarounds have evolved into a patchwork of state policies, leaving many businesses exposed without realizing it.
Coordinate With Legacy and Exit Planning
The temporary SALT cap increase should be considered as part of a larger strategy, including business succession planning, trust structuring, and charitable gifting. For business owners approaching retirement, optimizing deductions today could increase valuation and reduce taxes in the event of a sale.
FAQs About the SALT Cap $40,000
– What is the SALT cap for 2025–2027?
The SALT deduction cap has been increased to $40,000 per return for tax years 2025 through 2027, up from the previous $10,000 limit.
– Does this benefit apply to all taxpayers?
No. The benefit primarily applies to individual filers who itemize deductions and pay substantial state and local taxes—especially those who own pass-through entities.
– Can married couples split this deduction across separate returns?
Married filing separately does not double the deduction. The $40K cap applies per return, not per person, so splitting does not increase the total allowable deduction.
– How does this interact with California’s PTE tax workaround?
California’s elective Pass-Through Entity (PTE) tax workaround still exists, but coordination with the new SALT cap is crucial to avoid double-dipping or triggering IRS scrutiny. A CPA should assess whether one or both strategies are optimal.
– Should I adjust my estimated tax payments?
Yes. If your 2025 deductions will increase under the new cap, you may want to reduce estimated federal payments to account for a lower tax burden. Always confirm with your accountant first.
Don’t Miss the Window—Or Leave Money on the Table
Most entrepreneurs spend their energy on solving problems and seizing opportunities. But when tax law changes, inaction can be just as costly as a bad investment. For high-income business owners in California, the SALT cap $40,000 increase is more than a headline—it’s a once-in-a-decade opportunity to claim back what the old rules unfairly took away.
There’s a cost to doing nothing: overpaying the IRS, funding fewer opportunities, and carrying unnecessary stress. Every dollar lost to taxes is a dollar not reinvested into your business, your family, or your legacy.
If you’re earning over $500K annually and own a business in a high-tax state, it’s time to think strategically. Schedule a consultation with Focus Law and learn how to maximize the benefits of the SALT cap increase—before it disappears.
