As part of CalCPA’s Tax Bill Series, this article highlights two major updates in federal and California tax law that CPAs and individual taxpayers need to prepare for: the significant expansion of the State and Local Tax (SALT) deduction cap and the continued availability of the Pass-Through Entity (PTE) tax deduction—particularly for those in specified service trades. These changes have broad implications for high-income earners, small business owners, and tax professionals managing multi-year strategies.

Key Changes to the SALT Deduction Cap (Starting in 2025)

Under federal legislation effective for tax years beginning after December 31, 2024, the SALT deduction limit will increase substantially:

• The cap increases from $10,000 to $40,000 for most taxpayers.

• Taxpayers filing as married filing separately can deduct up to $20,000.

• Income-based phaseouts begin at:

  • $500,000 modified AGI for single/married joint filers

  • $252,500 for those married filing separately

• Once AGI reaches $600,000, the deduction reverts back to $10,000.

• The increased deduction gradually phases up each year until 2029.

• The cap will permanently revert to $10,000 in 2029 unless further legislation is passed.

Implication: This temporary increase creates a planning window for high-income individuals and property owners, especially in high-tax states like California and New York.

The Pass-Through Entity Tax Deduction Remains Intact

Earlier in the legislative process, there was considerable concern that specified service trades or businesses (SSTBs)—including accounting, legal, and healthcare firms—might be excluded from the PTE tax benefit. However, those limitations did not make it into the final bill.

• Specified service trades and businesses remain eligible for the PTE deduction.

• Taxpayers can still take advantage of the election at the state level, which may reduce federal taxable income.

• No changes were made to mirror §199A restrictions or carve-outs for SSTBs.

Implication: This is a relief for many small and midsize firms, allowing them to continue using the PTE structure as a workaround to the SALT cap.

California’s SB 132: Extension and Flexibility

• California taxpayers received further clarity and relief through SB 132, signed into law in June 2025:

• The state’s PTE election regime is extended through 2030.

• Beginning in 2026, taxpayers who miss the June 15 prepayment deadline can still make the election up until the extended due date of the return.

• However, the PTE credit will be reduced by 1.5% as a penalty for late prepayment.

Implication: This provides more flexibility but emphasizes the importance of proactive planning for election deadlines.

Avoiding Duplicate Deductions: A Critical Planning Note

CPAs should remind clients and tax teams of an important compliance detail:

If a PTE deduction is claimed in ordinary income, it should not be duplicated under Schedule A as part of the SALT deduction. The IRS has clarified that this would be considered double-dipping and could lead to audit exposure or disallowed deductions.

Strategic Considerations for CPAs and Clients

1. Evaluate Income Projections: Taxpayers with AGI under $600,000 may benefit substantially from the temporary SALT cap increase.

2. Assess PTE Election Viability: For entities not currently utilizing the PTE election, now is the time to consider the cost-benefit analysis of adopting it before the SALT cap reverts.

3. Communicate with Clients Early: Managing the timing of June 15 payments and educating clients on new relief rules will be critical in 2026 and beyond, especially for California taxpayers.

Conclusion

The upcoming changes to the SALT cap and the preservation of the PTE tax deduction offer significant planning opportunities—and potential pitfalls. CPAs should act now to model out multi-year scenarios for clients, avoid compliance missteps, and capitalize on the temporary benefits before the window closes in 2029.