As explained in Part 1, a majority of states now allow pass-through entity (PTE) owners to get around the federal $10,000 state and local tax (SALT) deduction cap on individual taxpayers by having their PTE pay state income tax on its income at the entity level.

Under this regime, the PTE deducts the state income tax as a federal business deduction, which is not subject to the $10,000 SALT cap.

The PTE owners get either a state tax credit for the tax payment or a reduction in their PTE income for state income tax purposes. Either way, they end up with a full (or near full) deduction on their federal income tax returns for the state income tax on their PTE income.

This is a big win for PTE owners. Here’s some guidance on how to take advantage of this opportunity.

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