Privately held manufacturers may benefit from the temporary
increase to the limit on the federal income tax deduction for state and local
taxes (SALT). Here's what you need to know about the current status of the
deduction, and steps you can take to maximize it through the 2029 tax year.
Background
Less than a decade ago, eligible SALT expenses were generally
100% deductible if an individual taxpayer itemized deductions. This provided
substantial tax savings to many taxpayers in locations with higher income or
property tax rates (or higher home values). The 100% deduction was also
valuable for owners of pass-through entities — partnerships,
S corporations and, usually, limited liability companies (LLCs) — where a
business's income, losses, deductions and credits pass through to the
individual owners.
The full deductibility of SALT expenses made an even bigger
impact on pass-through entities that were capital-intensive, such as many
manufacturers. These businesses tend to incur high SALT bills on their property
and certain other physical assets, sometimes across multiple jurisdictions. The
ability to deduct 100% of those taxes for federal income tax purposes reduced
the overall effective tax rate for the owners and freed up more cash for
capital investments and other manufacturing business expenditures.
Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) put a
$10,000 cap on the deduction ($5,000 for married couples filing separately),
significantly limiting the benefits described above. It also left owners of
pass-through entities in a position where they were essentially paying federal
tax on much of their state and local taxes — sometimes referred to as a "tax on
a tax." The cap was scheduled to expire after 2025.
In response to the $10,000 SALT cap, 36 states enacted
pass-through entity tax (PTET) laws to help the owners of pass-through
entities. The laws vary but typically allow these businesses to pay state
income tax at the entity level, where an unlimited amount can be deducted as a
business expense.
What's new?
Rather than letting the $10,000 cap expire or immediately making
it permanent, Congress included a provision in the One Big Beautiful Bill Act
(OBBBA) that temporarily quadruples the cap. Beginning in 2025, taxpayers can
deduct up to $40,000 ($20,000 for separate filers), with 1% increases each
subsequent year. So, for 2026, the limit is $40,400. The $10,000 SALT cap is
scheduled to return in 2030 without further legislation.
While the higher limit is in place, it's reduced for taxpayers
with incomes above a certain level. The allowable deduction is reduced by 30%
of the amount by which modified adjusted gross income (MAGI) exceeds a
threshold. For 2026, the threshold is $505,000; when MAGI reaches $606,333, the
higher limit is fully phased out and the previous $10,000 cap generally
applies. (These amounts are halved for separate filers.) The MAGI threshold
will also increase 1% each year through 2029.
The OBBBA preserved the state PTET workarounds. Although some of
the state PTET laws were scheduled to expire after 2025 (when the $10,000 cap
was slated to expire under the TCJA), most have been extended. Notably,
California extended its PTET election through 2030, and Illinois made its
workaround permanent. Both jurisdictions are generally considered high-tax
states, so these modifications are welcome news for owners of pass-through
manufacturing companies operating in them.
SALT planning for manufacturers
For some owners of pass-through manufacturing businesses, PTET
elections may still be worth considering. Their taxable income generally will
be reduced by their share of the PTET paid by the business, and they also can
potentially claim the individual SALT deduction for their personal SALT expense
up to the increased limit. As a result, it might make sense for some owners
that have been claiming the standard deduction in recent years to itemize
deductions to further reduce their tax bills. (For 2026, the standard deduction
is $16,100 for single filers and $32,200 for married couples filing jointly.)
In some cases, a PTET election could also reduce an owner's
self-employment tax.
For higher-income owners with MAGI at or above the phaseout
amount, who can't fully benefit from the increased SALT limit, PTET elections
may still be necessary to preserve their federal tax benefits for their
manufacturing company's SALT expenses. This may be especially likely for
multistate manufacturers shouldering large cumulative state tax burdens.
Manufacturers structured as pass-throughs should also consider
strategies that can reduce owners' MAGIs, maximizing their eligibility for the
SALT deduction. One option is accelerating capital asset purchases that had
been planned for after 2029. With 100% bonus depreciation now permanent, asset
purchases can reduce an owner's MAGI. Purchases that qualify for immediate
expensing under Section 179 can have a similar effect on MAGI. Other MAGI
reduction strategies include deferring income and maximizing retirement plan
contributions, on both the individual and business levels.
Act now
The temporary nature of the higher SALT deduction makes it
critical that manufacturers are proactive about taking the measures necessary
to maximize the benefits. We can help you find the best way to leverage the
higher cap limit for your circumstances.
