A Higher SALT Cap Leaves the Pass-Through Entity Tax Election as a Year-End Decision for Business Owners in DC, Maryland, Virginia and New Jersey
WASHINGTON, DC, October 2026. Mid-Atlantic Law & Tax, a tax law firm with offices in Washington, DC and Warren, New Jersey, is advising partners and S corporation owners to revisit the state pass-through entity tax election before the year closes, now that the 2025 federal tax law has raised the cap on the deduction for state and local taxes.
For 2025, the IRS instructions for Schedule A put the limit on the deduction for state and local income, sales and property taxes at $40,000, or $20,000 for married individuals filing separately, with the full amount available to filers whose income on Form 1040 line 11b is $500,000 or less. Above that level the Internal Revenue Code reduces the limit as income rises, though never below $10,000.
Many states allow a partnership, LLC or S corporation to pay state income tax at the entity level, where the business can generally deduct it for federal purposes. New Jersey's version, the Pass-Through Business Alternative Income Tax, has to be elected every year, and the New Jersey Division of Taxation says it may be most beneficial for owners who itemize, who are already subject to the federal limit on state and local tax deductions, or who have significant income flowing through a partnership or S corporation.
"While the cap sat at its old level, the entity-level election was close to automatic for many owners whose state tax bills ran well past it," said James A. Kraehenbuehl, the firm's attorney and CPA. "The higher cap changes that for some of them and not at all for others, depending on where their income falls against the phase-down. We weigh it owner by owner, with the state K-1s in hand, because an entity-level tax paid without checking those forms can leave the same income taxed twice."
What We Review With Owners Before December We start with each owner's position rather than the entity's. That means whether the owner itemizes, where their income sits against the threshold at which the cap starts to shrink, which states tax their share of the business income, and what each of those states requires to make or keep an election. In New Jersey, a calendar-year entity makes its annual election by March 15 of the following year, and the Division will not accept a payment until the election is on file.
We also compare the owner's own estimated payments with what the entity would pay. An entity-level tax covers the pass-through income only, so an owner with investment or retirement income may still need separate estimates, and the two need to be planned together.
Why the Answer Differs From One Entity to the Next The structure of the business changes the calculation. In New Jersey, for example, a partnership's tax for resident individual owners is measured on all of their share of income, while an S corporation's is measured on New Jersey-source income only. Two owners with similar incomes can therefore reach different answers, which is why we treat the election as a planning decision for each year rather than a standing setting.
About Mid-Atlantic Law & Tax Mid-Atlantic Law & Tax is a tax law firm with offices in Washington, DC and Warren, New Jersey, serving individuals and businesses across the District of Columbia, Maryland, Virginia and New Jersey. The firm handles IRS tax resolution, state tax matters in the District, Maryland and Virginia, tax planning and tax preparation. James A. Kraehenbuehl is an attorney and certified public accountant licensed in the District of Columbia. More detail on the firm's planning work is on its tax planning page.