PTE Tax Savings for California Taxpayers Under the New $40,000 SALT Cap

 

Cap

High-income taxpayers in California have long felt the pinch of the federal SALT (State and Local Tax) deduction cap. For years, the limit was stuck at $10,000, leaving many unable to deduct the full amount of state and property taxes they paid.

Now, with the new legislation raising the cap to $40,000 (or $20,000 if married filing separately), there’s fresh opportunity for savings. But here’s the twist: California’s Pass-Through Entity (PTE) tax election is still very relevant. In many cases, combining the new $40,000 cap with a PTE election can lead to even greater tax savings.

Let’s break it down.

What Changed with the SALT Deduction?

  • Old rule: Since 2018, taxpayers could only deduct up to $10,000 of state income and property taxes combined.

  • New rule (2025–2027): The cap is now $40,000 (or $20,000 if married filing separately).

👉 But the $40,000 cap phases down for higher earners. For example, if your income is over $500,000 (single) or $1,000,000 (married), the cap may shrink back toward $10,000.

Also, the deduction only matters if you itemize. If your mortgage interest, charitable giving, and state taxes don’t exceed the standard deduction, the cap won’t help much.

What Is California’s PTE Election?

California allows certain LLCs, partnerships, and S-corps to elect to pay state income tax at the entity level instead of the individual level.

  • The entity pays the California tax (at about 9.3%).

  • The entity deducts that payment on its federal return.

  • The owners receive a credit on their California return for their share of the tax paid.

This effectively shifts state tax into a federally deductible business expense—a major workaround to the SALT cap.

Why PTE Still Matters Even with the $40,000 Cap

You might think: “If I can now deduct $40,000, why bother with a PTE election?”

The answer: Because PTE deductions and SALT deductions can stack.

  • Without PTE: You’re capped at $40,000 (or less if phased down).

  • With PTE: Your business tax is deducted at the entity level plus you can still deduct personal property taxes and other SALT up to the $40,000 cap.

This often means tens of thousands of extra deductible dollars.

Example 1: Moderate-Income Business Owner

  • Filing Status: Married, joint

  • Income: $300,000

  • State income tax: $30,000

  • Property tax: $10,000

  • Other SALT: $2,000

Without PTE:

  • Total SALT = $42,000

  • Deduction capped at $40,000

  • $2,000 lost → costs ~$640 in extra federal tax (32% bracket)

With PTE:

  • Business pays $30,000 at entity level → full federal deduction

  • Personal SALT = $12,000 (well under $40,000 cap) → fully deductible

  • Net deduction = $42,000 (instead of $40,000)

  • Savings = ~$640

Example 2: High-Income Business Owner (SALT Phase-Down)

  • Filing Status: Single

  • Income: $600,000

  • State income tax: $50,000

  • Property tax: $15,000

  • Other SALT: $5,000

Without PTE:

  • Total SALT = $70,000

  • Due to income phase-down, only $20,000 deductible

  • $50,000 lost

With PTE:

  • Entity pays $50,000 at business level → full federal deduction

  • Personal SALT (property + other) = $20,000 → deductible under new cap

  • Net deduction = $70,000

  • Savings = ~$50,000 × 37% ≈ $18,500 in federal tax

Things to Watch Out For

  • Deadlines: California requires advance payments (June 15). Starting 2026, late payment only reduces the credit, but doesn’t kill eligibility.

  • Eligibility: Only “qualified taxpayers” can benefit. Not every partner or shareholder qualifies.

  • QBI Deduction: PTE elections may affect the Qualified Business Income (20%) deduction.

  • AMT: Alternative Minimum Tax rules may limit some benefits.

  • Temporary law: The $40,000 SALT cap currently sunsets after 2027.

Key Takeaways

  • The new $40,000 SALT cap is a big improvement for California taxpayers.

  • But high earners may still face phase-downs, and $40,000 may not cover all their state and property taxes.

  • PTE elections remain one of the best tools to maximize deductions—especially for business owners with large California tax bills.

  • In many cases, combining the PTE election with the $40,000 cap gives you the best of both worlds.

  • Always run the numbers with a CPA to see whether a PTE election is right for you.

👉 Bottom line: Don’t assume the higher SALT cap makes PTE irrelevant. For California taxpayers, the PTE election is still a powerful tax-saving strategy.


Here’s the enhanced interactive Excel calculator with a built-in bar chart so you can visually compare:

📊 Download the PTE SALT Savings Calculator with Chart

The chart displays:

  • Deduction without PTE

  • Deduction with PTE

  • Federal tax savings from PTE

How to Use the PTE vs SALT Savings Calculator

Follow these steps to test how much you could save with a PTE election under the new $40,000 SALT cap:

1. Download the Calculator

👉 Download the PTE SALT Savings Calculator with Chart
Open the file in Microsoft Excel, Google Sheets (with editing enabled), or another compatible spreadsheet program.

2. Enter Your Information

Go to the “Input” column and update these fields:

  • Federal Filing Status – Select Single or Married Filing Jointly.

  • Federal Marginal Tax Rate – Enter as a decimal (e.g., 0.32 = 32%).

  • Total Income – Enter your approximate taxable income (used to consider SALT phase-downs).

  • CA State Tax Paid by Business – The portion of California tax eligible for the PTE election.

  • Personal Property Tax – Annual property taxes you pay on your home(s).

  • Other State & Local Taxes – Vehicle registration fees, city taxes, etc.

  • SALT Cap – Default is $40,000. If your income is high enough that the cap is phased down, enter your reduced limit (e.g., $20,000).

3. Review Automatic Calculations

The calculator instantly fills in:

  • Total SALT Paid

  • Deduction WITHOUT PTE (limited by SALT cap)

  • Deduction WITH PTE

  • Extra Deduction from PTE

  • Federal Tax Savings from PTE

4. Check the Bar Chart

On the right side, you’ll see a visual bar chart comparing:

  • Deduction without PTE

  • Deduction with PTE

  • Federal Tax Savings from PTE

This makes it easy to see how much more you could save by making the election.

5. Interpret Your Results

  • If savings are small – You may already be fully covered under the new $40,000 SALT cap.

  • If savings are large – The PTE election could give you thousands more in deductible expenses and reduce your federal tax bill significantly.

6. Talk to Your CPA

This calculator is for illustration only. Your actual savings depend on your full tax situation (AMT, QBI deduction, other credits, etc.). Always review with a qualified tax advisor before making a PTE election.

Disclaimer

This article and the attached calculator are provided for educational and informational purposes only. They do not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Your actual savings will depend on your personal circumstances, including income level, filing status, eligibility for deductions/credits, and future legislation. Before making any tax elections such as the California PTE election, consult with a qualified CPA or tax advisor.


Comments

Post a Comment

Popular posts from this blog

Maximizing Tax Benefits for Short-Term Rentals with Cost Segregation: A Comprehensive Guide by Vik Randhawa CPA

  Maximizing Tax Benefits for Short-Term Rentals with Cost Segregation By Vik Randhawa, CPA Short-term rentals (STRs) have gained immense popularity as an investment strategy, offering property owners a lucrative income stream. However, beyond rental revenue, savvy investors can significantly reduce their tax burden using cost segregation studies to accelerate depreciation. Understanding how this strategy works and its impact on additional depreciation deductions can unlock substantial tax savings for STR owners. Understanding Cost Segregation for Short-Term Rentals Cost segregation is a tax-deferral strategy that involves identifying and reclassifying property components to shorter depreciation lives, allowing for accelerated depreciation. Typically, real estate assets are depreciated over 27.5 years (for residential properties) or 39 years (for commercial properties). However, certain components such as flooring, cabinetry, appliances, and landscaping can qualify for 5, 7, or 15...
Read more

Understanding Different Types of Business Entities and Their Pros & Cons - A Comprehensive Guide by Vik Randhawa, CPA

   Business Entities and Their Pros & Cons By Vik Randhawa, CPA Starting a business involves making several key decisions, and one of the most crucial is choosing the right business entity. The type of business entity you select affects your legal liability, tax obligations, and operational flexibility. In this blog, we’ll explore the most common types of business structures and their advantages and disadvantages. 1. Sole Proprietorship Overview: A sole proprietorship is the simplest and most common form of business entity, owned and operated by a single individual. Pros: Easy to Establish: Minimal paperwork and legal formalities. Full Control: The owner has complete control over business decisions. Tax Benefits: Business income is taxed as personal income, avoiding double taxation. Cons: Unlimited Liability: The owner is personally responsible for all business debts and obligations. Limited Growth Potential: Difficult to raise capital as investors may be hesitant to ...
Read more

Retirement Plan Options for the Self-Employed: A Guide by Vik Randhawa, CPA

  Retirement Plan Options for the Self-Employed: A Guide by Vik Randhawa, CPA As a self-employed individual, you wear multiple hats—entrepreneur, manager, and financial planner. One of the most critical financial decisions you’ll make is how to save for retirement. Unlike traditional employees who have access to employer-sponsored 401(k) plans, self-employed professionals must take charge of their own retirement savings. Fortunately, there are several excellent tax-advantaged retirement plans designed specifically for self-employed individuals. In this post, I’ll walk you through the most popular retirement plan options, their benefits, and how to choose the right one for your needs. 1. SEP IRA (Simplified Employee Pension Plan) Best for: Self-employed individuals and small business owners with few or no employees. Key Benefits: Allows contributions of up to 25% of net self-employment income or $69,000 (for 2024), whichever is lower. Tax-deductible contributions reduce your taxa...
Read more