House Bill H.R. 1 Advances to Senate

Update on the SALT Cap and PTET Deduction as of May 22, 2025

House bill H.R. 1, which was approved by the House and advanced to the Senate earlier today, May 22, 2025, includes the following Amendments to the “SALT cap” (i.e., section 112018, Limitation on Individual Deductions for Certain State and Local Taxes, etc.), among other provisions, contained in the original bill which was advanced by the Ways & Means Committee on May 14, 2025:

• Increased the limit on the federal deduction for state and local taxes to $40,000 per household ($20,000 for married taxpayers filing separately) starting in 2025.

• Adopted a threshold of $500,000 per household ($250,000 for married taxpayers filing separately) on modified adjusted gross income (MAGI) above which the federal deduction is phased out starting in 2025.

• For tax years between 2026 and 2033, the $40,000 and $500,000 SALT cap and threshold amounts are increased by 1% per year. For tax years after 2033, these amounts remain fixed at the 2033 level.

It should be noted that the effective date for these provisions was accelerated from 2026 originally to 2025 in the approved House budget.

There was a technical correction made to the original bill allowing a deduction for state pass-through entity taxes (PTETs) for section 199A qualified trades or businesses (i.e., non-SSTBs). Specifically, on page 971, line 12, the phrase “or (4)(A)(ii)” was inserted after “paragraph (3)(A)” of section 112018(b)(5) which defines “substitute payments.” As a result of this technical correction, the definition of this term in the approved House bill excludes an “excepted tax” as defined in paragraph (4)(A)(ii) of this section as “any tax as described in section 164(a)(3) which is paid or accrued by a qualifying entity with respect to carrying on a qualified trade or business (as defined in section 199A(d) without regard to section 199(A)(b)(3).” We believe that this technical correction reflects the legislative intent of the House to allow the PTET deduction for pass-through entities that are section 199A qualified trades or businesses (i.e., non-SSTBs) as per the Joint Committee on Taxation’s description (see page 311) of this provision.

Two days earlier, on May 20, 2025, the AICPA had submitted AICPA Comment Letter - One Big Beautiful Bill Act | Advocacy | AICPA & CIMA to the Ways & Means Committee in which it commented on various tax proposals in the bill. In this letter, the AICPA urged Congress to retain the PTET deduction for all pass-through entities, not just those that are section 199A qualified trades or businesses (i.e., non-SSTBs). It is yet to be seen whether the Senate would make any changes to the bill equalizing the SALT cap workarounds for all pass-through entities, including those that are SSTBs in addition to those that are non-SSTBs. We will continue to track the bill’s progress and update you on further developments.

Superseded Post from May 21, 2025 (read below)

According to CBS News,[1] the latest reported House GOP proposal is to allow a $40,000 SALT cap for families with up to $500,000 in income, after which the benefit would be phased out, effective for 2026.

After 2017, over 35 states and one locality have enacted elective pass-through entity taxes (PTETs) that serve as workarounds to the current SALT cap of $10,000 which expires at the end of 2025.[2] These PTETs allow the owners of electing pass-through entities to deduct state and local taxes as business expenses on the entity’s federal return without being subject to the current SALT cap in accordance with IRS Notice # 2020-75.[3]

The Ways and Means bill that was advanced on May 16, 2025, as currently written, appears to bar the SALT cap workarounds for all pass-through entities, regardless of whether they operate a trade or business that qualifies for the section 199A deduction. [4] For further details, please read Ways and Means Bill Curtails SALT Cap Workarounds for All Passthrough Entities – The Tax Law Center. [5]

There may be gaps in the plain text bill that allow SALT cap workarounds, which are not immediately obvious. Moreover, the bill is subject to change as it passes the House and moves to the Senate. There is likely to be a negotiation process to reconcile the two versions of the bill, before it can be sent to the president for his signature. So, it is too early to conclude whether the SALT cap workarounds will survive after 2025. We will keep you updated on this as the bill progresses.

Footnotes:

[1] Jennifer McLogan, Congress appears poised to raise SALT cap as part of Trump tax bill. Here’s the latest. (May 21, 2025, at 6:20 PM EDT), https://www.cbsnews.com/newyork/news/salt-cap-tentative-deal-president-trump-budget-proposal/

[2] Brian Myers and Eileen Reichenberg Sherr, Recent Developments in states’ PTETs, The Tax Adviser (September 1, 2024)

[3] Id.

[4] Miles Johnson and Michael Kaercher of NYU Law’s “The Tax Law Center” at https://taxlawcenter.org/blog/ways-and-means-bill-curtails-salt-cap-workarounds-for-all-passthrough-entitie (last visited May 21, 2025 at 6 pm ET)

[5] Id.