The tax landscape for pass-through entities is facing significant changes under the proposed "One Big Beautiful Bill" approved by Congress this week. While headlines may suggest the elimination of state and local tax (SALT) deductions for pass-through entities, the reality is more nuanced and requires careful analysis by tax practitioners.
Understanding the Current Framework
Since the Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 cap on individual SALT deductions, many states have implemented Pass-Through Entity Taxes (PTETs) as a workaround. These PTETs allow partnerships and S corporations to pay state income taxes at the entity level, creating a federal deduction that bypasses the individual SALT cap limitation. This strategy has provided substantial tax relief for many pass-through entity owners, particularly those in high-tax states.
The Proposed Changes
The new tax bill does not eliminate SALT deductions entirely for pass-through entities. Instead, it creates a targeted limitation that significantly affects specified service trades or businesses (SSTBs). Under the proposed legislation, pass-through entities that are not eligible for the Qualified Business Income (QBI) deduction under Section 199A would lose the ability to deduct state and local income, real property, personal property, and general sales taxes at the entity level.
This change effectively undermines the PTET workaround for professional service firms, including accounting practices, law firms, medical practices, dental offices, and consulting businesses. These SSTBs, which were already limited in their ability to claim the full QBI deduction, would now face additional tax burdens through the loss of entity-level SALT deductions.
Practical Implications
For tax practitioners, this represents a dual challenge. Professional service firms will experience increased tax liability while simultaneously losing a key tax planning strategy. The American Institute of CPAs has raised concerns that these changes create an unfair disparity between pass-through entities and C corporations, potentially discouraging business formation and growth in the service sector.
Interestingly, the proposed bill would increase the individual SALT cap from $10,000 to $40,000, providing some relief at the individual level. However, for high-income professionals in service businesses, this increase may not fully offset the loss of entity-level deductions.
Strategic Considerations
Tax practitioners should begin evaluating alternative strategies for affected clients. This may include reassessing entity structure choices, considering C corporation elections, or exploring other deduction optimization techniques. The timing of any structural changes will be critical, as the effective dates and transition rules remain subject to legislative negotiation.
The proposed changes highlight the ongoing tension between federal tax policy and state-level responses to federal limitations. As the bill progresses to the Senate, practitioners should monitor developments closely and prepare clients for potential implementation of these restrictions.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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