For small business owners, new tax legislation can often feel like a complicated maze, full of new rules and potential pitfalls. Rather than seeing this as an obstacle, we at Lightening the Load view it as an opportunity to help you navigate your tax journey with confidence. A recent tax bill has introduced several significant changes, and understanding them is crucial for your business’s financial well-being. Let’s take a closer look at what the new rules on State and Local Tax (SALT) deductions mean for you.
Understanding the New SALT Rules
The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a significant change by capping the federal deduction for SALT at $10,000 for individuals. This was a notable shift, particularly for business owners in high-tax states. The new tax bill, however, brings a temporary change to this rule.
Starting in 2025, the cap on the SALT deduction has been raised to $40,000 for most taxpayers, though it includes a phase-out for higher-income earners. This change is not permanent; the deduction will increase by 1% annually through 2029 and then revert to the $10,000 cap in 2030.
The Impact on Your Pass-Through Business
For many small business owners, this change directly impacts their personal tax situation. If your business is structured as a pass-through entity—such as an S-Corporation, partnership, or LLC—your business income is typically “passed through” to your personal tax return. This is where the SALT deduction comes into play.
The new bill also has implications for the “Pass-Through Entity Tax” (PTET) workaround. In response to the initial $10,000 cap, many states created a PTET election, which allows a business to pay state income taxes at the entity level. This payment is then deductible as a business expense, effectively bypassing the individual SALT cap. The new tax bill preserves the use of this strategy, which is a relief for many business owners who rely on it.
However, the rules for PTET can vary widely from state to state, and the decision to use this workaround requires careful consideration. A professional can help you weigh the benefits of a PTET election against the new, higher individual SALT deduction cap to determine the most advantageous strategy for your specific business.
Why Proactive Planning Is Essential
The new tax bill is not just about a single number; it’s about a shifting tax landscape that requires a strategic approach. What works one year might not work the next, especially with the temporary nature of the new SALT cap. Proactive planning is key to maximizing your tax position, ensuring you’re not caught off guard by changes in the law.
The new tax bill could change how you operate. Contact Lightening The Load today for a clear breakdown of how these changes affect your bottom line.
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