For most of the last decade, the state and local tax cap was the change founders complained about most. The 2017 law limited the deduction for your state and local taxes to $10,000 a year. If you lived in a state with a real income tax and earned a real income, you watched a deduction you used to take in full get chopped down to a number that barely covered your property bill. Then, in the summer of 2025, the One Big Beautiful Bill Act raised that cap to $40,000, and the story wrote itself. Relief had finally arrived. Deduct more, stop complaining, move on.
Read the fine print and the relief gets thinner. The $40,000 cap does not apply to everyone. Once your modified adjusted gross income passes $500,000, the cap starts shrinking. It drops by thirty cents for every dollar of income above that line, and by the time you reach $600,000 you are back to a $10,000 cap, exactly where you started. The number rises about one percent a year through 2029, then reverts to $10,000 in 2030. So the celebrated fix is temporary, income-tested, and engineered to vanish at precisely the income where a serious business owner lives.
Here is the part almost no one said out loud. If you own a pass-through business, an S corporation, a partnership, or most LLCs, you never needed Congress to raise the individual cap at all. Since 2020 there has been a fully legal, openly blessed way to deduct one hundred percent of your state income tax with no cap on it. Most owners still are not using it. Not because it is aggressive. Because their return was filed the default way, and the move only happens when someone chooses it on purpose.
The deduction that never had a cap
The mechanism is called the pass-through entity tax, and it is not a loophole. In late 2020 the IRS issued Notice 2020-75, which confirmed that when a partnership or S corporation pays state income tax at the entity level, that payment is deductible on the federal return as an ordinary business expense. The individual SALT cap sits on your personal return. This deduction lands on the business return, above that cap, where the $10,000 and $40,000 limits do not reach.
States moved quickly. More than thirty states with an income tax have now enacted a pass-through entity tax, letting the business elect to pay the owner's state income tax itself. The owner then takes a credit on the state return, so the total state tax owed does not change. What changes is where the deduction sits on the federal side. Instead of a capped personal itemized deduction, you get an uncapped business deduction that reduces the income flowing through to you.
The size of this is easy to miss until you put numbers on it. Take an owner with a million dollars of pass-through income in a state with a nine percent income tax. That is roughly $90,000 of state tax. On the personal return, the most that owner can deduct is $40,000, and if income clears $600,000, only $10,000. Through the pass-through entity tax, the business deducts the full $90,000 federally. The difference between deducting $10,000 and deducting $90,000 is $80,000 of additional deduction. At a 37 percent federal rate, that is about $29,600 in federal tax saved, every single year, on a payment you were already making anyway.
The owner writes the same check to the state either way. The only question is whether the federal return treats that check as a $10,000 personal deduction or a $90,000 business one. Same money, two very different returns.
The One Big Beautiful Bill Act did not touch this. Through all the noise about raising the cap, Congress left the pass-through entity workaround fully intact and, for planning purposes, permanent. Even specified service businesses, the law firms and consultancies usually walled out of the better tax breaks, can use it at the federal level. The workaround that was supposed to be temporary outlived the debate about the cap it was designed to route around.
Why it sits there unused
If this is legal, blessed, and worth tens of thousands a year, the obvious question is why most eligible owners are not doing it. The answer is not that their accountant is bad. It is that filing a return and running a strategy are two different jobs, and most owners have hired only for the first one.
A compliance-first preparer takes what happened last year and reports it accurately. That is the right job, done correctly. But the pass-through entity tax is not something that happened. It is a decision made before the year closes. The election has deadlines. It usually requires the business to make estimated tax payments at the entity level during the year, not the owner. In many states the choice is locked in once made, and it interacts with your qualified business income deduction, your nonresident owners, and the rules of every state you operate in. None of that shows up in a shoebox of receipts in March. It has to be chosen in advance by someone whose job is to look forward, not back.
This is the recurring pattern with tax. The preparer is filling the wrong vacancy for the work you actually need. Right person, right skill, wrong seat. Filing is a record of the past. Architecture is a set of decisions about the future, and the pass-through entity tax only pays you if someone is sitting in the second seat before the year runs out.
A test you can run today
You do not need a meeting to find out where you stand. Pull last year's business return and answer three questions.
First: does my state have a pass-through entity tax, and did my business actually elect it? Look on the entity return for a state income tax paid at the business level. If it is not there, and your state offers the election, you left the deduction on the table.
Second: what was my total state income tax last year, and how much of it did I actually deduct on my federal return? If your state tax was $60,000 and your federal deduction for it was $10,000 or $40,000, the gap between those numbers is real money that a different filing choice could have captured.
Third: is this election something my preparer makes for me automatically, or a strategy decision that no one actually owns? If you cannot name the person responsible for making the call each year, then no one is making it, and the default answer to any tax election you do not choose is no.
One lever, not a trick
The reason to care about this goes past one deduction. The pass-through entity tax is a small window into whether your structure is being run as a system or as a stack of separate errands. The election is only available, and only clean, depending on the entity you chose years ago, which is a tax and structure question. The timing of those entity-level payments is a cash flow question, which is capital. In a partnership, deciding who bears the payment and who gets the benefit is written into the partnership agreement, which is a partnerships question. And none of it works unless your books close on time with accurate state-by-state numbers, which is a systems question.
Tax, capital, partnerships, systems. They are not four departments that meet once a year. They are one decision seen from four sides. Handle them separately and each one quietly works against the others. The entity that saved you on formation blocks the election. The election you missed inflates the income your capital plan is built on. Handle them as a single system and something as ordinary as a state tax election returns you tens of thousands a year with nothing aggressive about it, because the whole structure was built to let it.
The raised cap was written for headlines. It gives a modest, shrinking break to people who mostly do not need it and takes it away from the ones who do. The deduction that actually matters for owners has been available the whole time, uncapped, waiting for someone to choose it. The founders who keep what they build are not the ones who caught a lucky break in the tax code. They are the ones who had someone in the forward-looking seat, making the call before the year closed.
If you are interested in exploring an engagement, the starting point is a 30-minute private call. There is no pitch and no pressure, it is a conversation to find out whether the work makes sense. You can book directly at calendly.com/chelsea-eba/30min.
About the author
Chelsea Michelle is the founder of Elevated Business Advisors, a private advisory practice for founders, investors, and family offices. She architects tax, capital, partnerships, and AI and systems as one integrated system for a deliberately small roster of clients, by application, across Florida and nationally. She also hosts The Power of the Pivot podcast.