Republican Tax Bill Targets SALT Workarounds for Pass-Through Business Owners

As the House and Senate continue negotiations over the “One Big Beautiful Bill,” a significant development is sending ripples through the small business and tax advisory community: Republicans are aiming to restrict SALT cap workarounds used by pass-through entities, a move that could generate up to $20 billion annually in additional tax revenue.

But for CPAs, tax attorneys, and wealth advisors, this change could mean major year-end planning shifts and more exposure for high-income clients in high-tax states.

What Are SALT Workarounds?

Under the 2017 Tax Cuts and Jobs Act (TCJA), individuals could only deduct up to $10,000 in state and local taxes on their federal returns. To bypass this limit, over 36 states adopted Pass-Through Entity (PTE) taxes—a workaround allowing owners of partnerships and S corporations to pay state income tax at the entity level, thus making the deduction fully available at the federal level.

This workaround has been a lifeline for high earners and small business owners in states like California, New York, Illinois, and New Jersey, where state tax burdens are among the highest in the nation.

What the Republican Proposal Does

Both the House and Senate bills seek to limit or eliminate this workaround in different ways:

• House Version: Prohibits specified service businesses like law firms, accounting firms, medical practices from using the workaround altogether.Limits the total PTE deduction to $50,000 per owner for all qualifying income.

  
  

• Senate Version: Introduces a phase-out tied to federal adjusted gross income business owners making over $500,000 individually or $1 million jointly would see reduced or eliminated benefits. Requires uniformity in state implementation making state-level PTE elections harder to structure flexibly.

  
  

The stated goal: close “loopholes” and prevent what lawmakers call a “backdoor repeal” of the SALT cap.

What’s at Stake for Tax Professionals

For CPA firms and tax planners, this move has far reaching implications:

• Entity structure strategies may need revisiting as the cost-benefit of partnerships vs. corporations shifts.

• Multi-state compliance becomes more complex, especially for clients operating in PTE states with evolving legislation.

• 2025 estimated tax calculations may need to adjust for lower deductibility at the federal level.

• Client communication is key many business owners are unaware that the SALT workaround is even under threat.

  
  

This provision may not make the headlines, but it’s one of the most consequential tax changes for the small business sector in the bill.

Why This Matters Now

The proposed SALT restriction changes are especially relevant because:

• Final reconciliation between House and Senate versions is due by July 4th, 2025.

• Q3 estimated tax payments (due in September) may be impacted.

• States may also retaliate or decouple in response, especially those that just enacted PTE tax regimes in the last 12–18 months.

  
  

In short: what happens in the next two weeks could determine how business owners structure and deduct their income for the next five years.

How Bizora AI Can Help

Bizora AI tracks state-by-state PTE laws, models the impact of federal deduction limits, and generates real-time client memos for your firm to send before the rules change.

Need to see how the SALT workaround rollback affects your clients in New York or California?→ Ask Bizora AI for instant, state-specific analysis with citations.