2. Strategy: Leveraging PTET Before and After the Sunset
While we wait for 2026, the most aggressive and effective tool currently available is the Pass-Through Entity Tax (PTET) election. According to the American Institute of CPAs (AICPA), over 36 states have now enacted PTET laws as a legal "workaround" to the $10,000 SALT cap. This strategy allows S-Corporations and Partnerships to pay state income taxes at the entity level rather than the individual level.
According to IRS Notice 2020-75, the IRS formally blessed these state-level entity taxes, clarifying that they are deductible in computing an entity's non-separately stated income or loss. This means the deduction is taken on Form 1120-S or Form 1065, reducing the K-1 income reported to the owner. Because the deduction happens at the business level, it effectively bypasses the $10,000 limit on individual itemized deductions.
| Feature |
Pre-2026 (SALT Cap Active) |
Post-2026 (SALT Cap Expired) |
| Max SALT Deduction |
$10,000 |
Unlimited (Subject to Pease) |
| PTET Usefulness |
Critical for high-earners |
Still useful for AGI reduction |
| Standard Deduction |
~$29,200 (Married Filing Jointly) |
Expected to drop by ~50% |
| Top Fed Tax Rate |
37% |
Reverts to 39.6% |
Even after the SALT cap expires in 2026, the PTET may remain an aggressive strategy. Why? Because PTET reduces your Adjusted Gross Income (AGI), whereas itemized deductions on Schedule A do not. A lower AGI can help you qualify for other tax credits, reduce the impact of the Net Investment Income Tax (NIIT), and potentially lower the thresholds for medical expense deductions. Our team analyzes the specific state guidance—such as California's Assembly Bill 150 or New York’s Article 24-A—to ensure the entity-level tax is calculated correctly to maximize the federal benefit.
Source: IRS Notice 2020-75
3. Strategic Timing: The 2025-2026 “Deduction Bridge”
One of the most powerful strategies for small business owners is the timing of state tax payments. If the SALT cap is in place for 2025 but gone for 2026, your objective should be to defer your state tax payments into the 2026 calendar year whenever possible—unless you are utilizing a PTET election.
For example, state estimated tax payments for the fourth quarter are typically due on January 15. If you pay your Q4 2025 state estimates on December 31, 2025, that deduction is subject to the $10,000 cap. However, if you wait until January 2, 2026, that payment becomes an itemized deduction for the 2026 tax year, where it may be fully deductible. According to IRS Publication 505, taxpayers are generally required to pay at least 90% of their current year tax or 100% of their prior year tax to avoid underpayment penalties. We work with our clients to perform a "Penalty vs. Deduction" analysis—sometimes it is mathematically superior to pay a small state underpayment penalty in exchange for a massive federal deduction in the following year.
Furthermore, we must consider the Alternative Minimum Tax (AMT). Before 2017, the AMT was the primary "vampire" that sucked away the benefits of SALT deductions for high-income earners. The TCJA significantly raised the AMT exemption thresholds. When the TCJA sunsets in 2026, those thresholds will revert to lower levels. Per Tax Policy Center data, the number of AMT payers is expected to jump from roughly 200,000 today back to over 7 million in 2026. An aggressive strategy requires modeling your 2026 income now to ensure that a massive SALT deduction doesn't simply trigger a higher AMT bill, effectively neutralizing your savings.
PRO TIP: The "Bunching" Strategy for 2026
With the standard deduction dropping in 2026, we recommend "bunching" other itemized deductions—like charitable contributions or elective medical procedures—into the 2026 tax year. By combining these with your now-unlimited SALT deduction, you create a "super-deduction" year that far exceeds the new, lower standard deduction. This is particularly effective for business owners who can control the timing of their bonuses or business expenses.
4. The Cross-Border Complexity: SALT and Foreign Tax Credits
For our clients with cross-border interests, particularly those moving between the US and Canada, the expiration of the SALT cap adds a layer of complexity to Form 1116 (Foreign Tax Credit) calculations. According to Article XXIV of the US-Canada Tax Treaty, the goal is to eliminate double taxation. However, the interaction between state tax deductions and foreign tax credits is often misunderstood.
When the SALT cap was $10,000, many expats focused heavily on the Foreign Tax Credit to offset their US federal liability because their state tax deduction was so limited. In 2026, as the state deduction becomes unlimited again, it will reduce your US taxable income more significantly. This might seem like a pure win, but it can actually reduce your "Foreign Tax Credit Limit." Per IRS Treasury Regulation §1.904-4, your foreign tax credit is limited to the portion of US tax attributable to your foreign source income. If your SALT deduction for a state tax paid on that foreign income is higher, your US tax on that income is lower, potentially leaving you with "excess" foreign tax credits that you cannot use in the current year.
Our team specializes in this precise intersection. We analyze whether it is more beneficial to take the Foreign Tax Credit on Form 1116 or the Foreign Earned Income Exclusion on Form 2555, in light of the renewed strength of the SALT deduction. For business owners with operations in both Toronto and New York, for example, the 2026 shift requires a complete recalibration of the "tax drag" on both sides of the border. We also ensure that any Canadian provinces taxes paid are correctly characterized for US reporting to maximize every available dollar of relief.
5. Aggressive Entity Structuring: C-Corp vs. S-Corp in the Post-SALT Era
The expiration of the SALT cap may also change the math for entity selection. Since 2018, many business owners shifted to S-Corps to take advantage of the 20% Qualified Business Income (QBI) deduction under Section 199A. However, the QBI deduction is also scheduled to expire on December 31, 2025. According to Congressional Research Service data, the QBI deduction has been one of the most widely used provisions by small business owners, but its disappearance in 2026, combined with the return of the 39.6% top individual rate, makes the C-Corporation look more attractive again.
C-Corporations have always been able to deduct 100% of their state income taxes as a business expense on Form 1120, completely unaffected by the $10,000 SALT cap. If the individual top rate returns to 39.6% and the SALT cap vanishes, but the Pease limitation and AMT return to haunt high-earning individual filers, the flat 21% corporate tax rate (which is currently permanent, though subject to legislative change) may provide a more stable environment for reinvesting profits.
We perform "Entity Optimization Studies" for our clients, projecting five-year tax outcomes under different structures. An aggressive strategy for 2026 might involve a conversion or the use of a "Personal Holding Company" structure to trap income at lower corporate rates while maximizing the deductibility of state taxes and other business expenses. This is not a one-size-fits-all approach; it requires a deep dive into your business's cash flow needs and long-term exit strategy.
Source: Congressional Research Service
Common Mistakes to Avoid
- Overpaying 2025 State Estimates: Many business owners habitually pay their Q4 estimates in December. In 2025, this could cost you thousands in lost deductions. If you aren't in a PTET-eligible state, wait until January 2026 to pay that state bill.
- Ignoring the AMT Return: Don't assume an unlimited SALT deduction means a zero tax bill. The 2026 Alternative Minimum Tax rules are much stricter than the current ones. According to FinCEN and IRS compliance data, missing AMT triggers is one of the leading causes of automated tax notices for high-income earners.
- Missing the PTET Election Deadline: Most states require the PTET election to be made by March 15 or the date of the first estimated payment. Once the deadline passes, you lose the "workaround" for that tax year.
- Poor Cross-Border Record Keeping: If you are claiming state tax deductions in 2026 for taxes paid on foreign income, ensure you have the Form 8938 and FBAR (FinCEN Form 114) filings to support your international footprint. The IRS has increased audit focus on "high-wealth" international taxpayers.
Frequently Asked Questions
Will Congress extend the $10,000 SALT cap before 2026?
While there is bipartisan support for modifying the SALT cap, especially from "Blue State" Republicans and Democrats, no legislation has passed yet. Our planning assumes the law will sunset as written. We build flexible strategies that can pivot if the law changes in late 2025.
Can I still use the PTET workaround in 2026 if the cap expires?
Yes. Even if the SALT cap expires, the PTET can be beneficial because it reduces Adjusted Gross Income (AGI) at the federal level, whereas a Schedule A deduction does not. A lower AGI is often the key to unlocking other tax benefits.
What happens to the standard deduction in 2026?
According to current law, the standard deduction will return to its pre-2018 levels, adjusted for inflation. This means for married couples, it will likely drop from roughly $30,000 to around $16,000-$18,000. This makes itemizing your SALT deductions essential.
Does the SALT cap expiration affect my corporate taxes?
No. The SALT cap only applies to individual itemized deductions on Schedule A. C-Corporations have always been able to deduct state taxes as a business expense without the $10,000 limit.
Don't Wait Until 2026 to Plan Your Exit from the SALT Cap
The sunset of the TCJA is the most significant tax planning opportunity of the decade. Our team at Zenith Financial Advisors specializes in helping high-net-worth business owners and cross-border professionals maximize their deductions while staying in full compliance with the IRS and CRA.
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