Preparing for the 2026 SALT Cap: What High-Tax State Business Owners Must Know 

For business owners in California, New York, New Jersey, Connecticut, and other high-tax states, the state and local tax (SALT) deduction has been a contentious issue since 2017. The $10,000 cap imposed by the Tax Cuts and Jobs Act hit high-earning taxpayers particularly hard, effectively raising their federal tax burden by eliminating deductions for state income and property taxes above that threshold. 

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, temporarily increased the SALT deduction cap to $40,000 for tax years 2025 through 2029. For 2026 specifically, the cap rises to $40,400 as part of the annual 1% increase built into the legislation. While this represents significant relief for many business owners, the benefits are not universal, the rules are complex, and the temporary nature of the increase creates planning challenges. 

Understanding the nuances of the 2026 SALT deduction changes is essential for effective tax planning, especially for business owners who operate across multiple states or who structure their businesses as pass-through entities. 

The SALT Cap Timeline 

Before diving into planning strategies, it’s important to understand the full timeline. The TCJA originally capped the SALT deduction at $10,000 starting in 2018, with that cap set to expire at the end of 2025. The OBBBA modified this timeline significantly. 

For 2025, the cap increased to $40,000. In 2026, it rises to $40,400. The cap will continue increasing by 1% each year through 2029, when it reaches approximately $41,600. Then, on January 1, 2030, the cap reverts to $10,000 permanently unless Congress acts again. 

This creates a five-year window of enhanced deductibility followed by a cliff. Business owners should plan their tax strategies with both the temporary benefits and the eventual reversion in mind. 

The Income Phaseout Creates a Tax Torpedo 

While the $40,400 cap for 2026 sounds straightforward, the reality is more complicated due to an income-based phaseout. The full $40,400 deduction is only available to taxpayers with modified adjusted gross income (MAGI) of $505,000 or less (half that for married filing separately). 

Above that threshold, the deduction phases down at a rate of 30 cents for every dollar of income over $505,000. The phaseout continues until income reaches $606,000, at which point the deduction drops to the floor of $10,000 where it remains regardless of how high income goes. 

This phaseout creates what tax professionals have dubbed a ‘SALT torpedo,’ an artificially high marginal tax rate for taxpayers in the phaseout range. According to analysis from Kiplinger and other tax publications, taxpayers with incomes between $505,000 and $606,000 can face effective marginal tax rates exceeding 45% when the phaseout effect is combined with the 37% top tax bracket. 

For business owners with income that varies year to year, this creates planning complexity. A year with higher income due to a business sale, large bonus, or successful exit could push you into the phaseout range, effectively limiting your SALT deduction just when you need it most. 

Who Benefits Most from the Increased Cap 

The increased SALT cap provides the most benefit to upper-middle-income and affluent taxpayers in high-tax states who itemize their deductions. According to IRS data cited by the Bipartisan Policy Center, the states with the highest proportion of taxpayers claiming the SALT deduction include Connecticut, New York, California, New Jersey, and Maryland. 

A typical beneficiary might be a business owner earning $450,000 who pays $25,000 in state income taxes and $15,000 in property taxes for a total SALT liability of $40,000. Under the old $10,000 cap, this taxpayer could only deduct $10,000. Under the 2026 rules, they can deduct the full $40,000, reducing their federal taxable income by an additional $30,000 and saving approximately $11,100 in federal taxes (at the 37% rate). 

However, not all business owners in high-tax states will benefit. Those with SALT liabilities below $10,000 see no change. Those earning above $606,000 remain capped at $10,000. And critically, the increased standard deduction established by the TCJA (and made permanent by the OBBBA) means many taxpayers don’t itemize at all. 

According to IRS statistics, only about 10% of taxpayers itemized deductions in 2022, down from 31% in 2017 before the TCJA. The $15,750 standard deduction for single filers and $31,500 for married couples filing jointly in 2026 exceeds the total itemized deductions for most households. 

State-Level SALT Workarounds 

In response to the original $10,000 SALT cap, many states created workarounds for pass-through entities like S corporations, partnerships, and LLCs. These pass-through entity tax (PTET) elections allow the business to pay state income taxes at the entity level rather than having owners pay at the individual level. 

Because the business pays the tax, it can deduct the full amount as a business expense, not subject to the SALT cap. The owners then receive a corresponding credit or exclusion on their state returns, avoiding double taxation. 

Originally, these workarounds were attractive because they allowed unlimited state tax deductions. With the increased SALT cap, the calculus changes. According to analysis from TaxAct and other sources, PTET elections remain valuable for business owners with state tax liabilities significantly exceeding $40,000. However, the administrative complexity and potential compliance costs may not be worth it for those with more modest state tax bills. 

Business owners should work with their tax advisors to model whether a PTET election makes sense under their specific circumstances. The analysis needs to consider total state tax liability, whether the business has multiple owners, how state credits interact with the entity-level payment, and whether the administrative burden justifies the tax savings. 

Planning Strategies for 2026 and Beyond 

Given the temporary nature of the increased SALT cap and the income phaseout, business owners should consider several strategies to maximize their tax efficiency. 

First, consider timing of income and deductions. For business owners with flexibility over when to recognize income, shifting income into years when SALT liabilities are higher can maximize the deduction benefit. Conversely, deferring income to avoid the phaseout range may make sense in certain years. 

Second, evaluate whether to accelerate state tax payments. For those near but not exceeding the $40,400 cap, making fourth-quarter estimated state tax payments before December 31 rather than in January can help capture the full deduction. Some taxpayers may even benefit from prepaying 2026 property taxes in late 2025 if local jurisdictions allow it. 

Third, consider geographic arbitrage. While relocating purely for tax reasons is rarely advisable, business owners contemplating a move anyway should factor in how different state tax regimes interact with the SALT cap. Moving from California to Florida eliminates state income tax entirely, making the SALT cap irrelevant. 

Fourth, optimize entity structure. The interaction between business entity choice and the SALT cap creates planning opportunities. C corporations pay entity-level taxes not subject to the individual SALT cap. For some business owners, converting from an S corporation to a C corporation might make sense, particularly if they can benefit from the lower 21% corporate rate and manage the double taxation issue through reasonable compensation and dividend strategies. 

Fifth, maximize other itemized deductions. For taxpayers close to the standard deduction threshold, bunching charitable contributions, mortgage interest, and other itemized deductions into alternating years can help ensure you exceed the standard deduction in years when you itemize. 

The 2030 Cliff and Long-Term Planning 

The scheduled reversion to a $10,000 SALT cap in 2030 creates a planning cliff that business owners should not ignore. Waiting until 2029 to address this could result in missed opportunities. 

For business owners planning major liquidity events like selling a business, the timing relative to the SALT cap becomes significant. A business sale in 2029 allows you to deduct up to $41,600 in SALT. That same sale in 2030 caps your SALT deduction at $10,000, potentially costing tens of thousands in additional federal taxes. 

Similarly, business owners considering major real estate transactions, equity compensation exercises, or other high-income events should factor in how the SALT cap interacts with overall tax liability in different years. 

Of course, Congress could extend or modify the higher SALT cap before 2030. Tax legislation moves in political cycles, and what seems certain today may change before the deadline. Building flexibility into your plans allows you to adapt as the tax landscape evolves. 

Alternative Minimum Tax Considerations 

Before the TCJA, the alternative minimum tax (AMT) affected millions of taxpayers and significantly limited the SALT deduction for many six-figure earners. The TCJA dramatically reduced AMT exposure by increasing the exemption amounts and phaseout thresholds. 

The OBBBA maintained these higher AMT thresholds, meaning few taxpayers will be subject to AMT going forward. However, the interaction between the SALT cap phaseout and AMT rules can create unexpected results in certain situations. 

Business owners with significant state tax liabilities should work with their advisors to verify that AMT will not limit their ability to benefit from the increased SALT cap. This is particularly important for those with large amounts of incentive stock options, private activity bond interest, or other AMT preference items. 

Documentation and Compliance 

Claiming the SALT deduction requires proper documentation. Business owners should maintain detailed records of all state and local tax payments, including copies of state tax returns, property tax bills, and proof of payment. 

For those making strategic decisions about timing of tax payments or PTET elections, the documentation becomes even more critical. You need to demonstrate the business purpose and economic substance of transactions, not just the tax benefit. 

The IRS has specific rules about what qualifies as deductible state and local taxes. For instance, you can deduct either state income taxes or state sales taxes, but not both. Most business owners choose income taxes because they’re typically larger. Property taxes are deductible separately. 

However, certain payments to state and local governments do not qualify as deductible taxes. This includes fees for services (like water or trash collection), homeowner association fees, transfer taxes on property sales, and taxes for local benefits that increase property value. 

Multi-State Business Considerations 

Business owners operating in multiple states face additional complexity. Each state has its own tax rules, and business activity in multiple jurisdictions can trigger filing requirements, estimated tax obligations, and apportionment calculations. 

The SALT deduction aggregates all state and local taxes, regardless of which states they’re paid to. A business owner living in New York but operating businesses in New Jersey and Connecticut must total all state income taxes and property taxes across all states when calculating the SALT deduction. 

This creates opportunities for tax planning through strategic location of business operations and careful attention to each state’s tax calculation rules. Some states offer more favorable treatment of business income, while others provide credits for taxes paid to other states. 

The Charitable Deduction Floor 

An often-overlooked provision of the OBBBA affects high-income taxpayers who itemize. Beginning in 2026, charitable deductions for those in the 37% tax bracket are subject to both a floor and a ceiling. 

The floor requires that charitable contributions exceed 0.5% of adjusted gross income before any deduction is allowed. For a taxpayer with $1 million in AGI, the first $5,000 of charitable contributions produces no deduction. Only amounts above that threshold are deductible. 

Additionally, the value of the deduction is capped at 35% for taxpayers in the 37% bracket, meaning each dollar donated saves only 35 cents in federal taxes rather than 37 cents. 

While these provisions don’t directly affect the SALT deduction, they impact overall itemized deduction planning. Business owners need to consider all itemized deductions holistically to determine the optimal tax strategy. 

How Escalon Can Help 

Navigating the complexities of the SALT deduction requires careful coordination between business operations, tax compliance, and strategic planning. At Escalon, our tax operations team works with business owners to optimize their tax position while maintaining full compliance with federal and state requirements. 

We can help you model different scenarios to understand how the SALT cap affects your specific situation. We work with your tax advisors to ensure your business entity structure, compensation strategy, and transaction timing align with your overall tax goals. 

Our services include multi-state tax compliance, estimated tax planning, entity structure analysis, and coordination with your professional advisors to ensure all aspects of your tax strategy work together efficiently. 

Taking Action 

The increased SALT cap for 2026 provides real tax savings for many business owners in high-tax states, but the benefits are neither automatic nor universal. Understanding the income phaseout, considering state-level workarounds, and planning for the 2030 reversion all require proactive attention. 

Business owners should review their projected 2026 income and state tax liabilities with their advisors to determine whether they’ll benefit from the increased cap and to what extent. This analysis should inform decisions about business operations, compensation timing, and major transactions. 

The five-year window before the SALT cap reverts to $10,000 creates both opportunities and risks. Those who plan strategically can maximize tax efficiency during the enhanced deduction period. Those who fail to plan may find themselves with unnecessarily high tax bills and missed opportunities. 

If you operate a business in a high-tax state and want to understand how the 2026 SALT cap changes affect your tax situation, contact Escalon’s tax operations team. We can help ensure you’re positioned to take full advantage of the temporary relief while preparing for the eventual reversion.