SALT Workaround Explained: 5 Must-Know Tax Secrets for Business Owners
With the recent increase in the SALT deduction limits, we’ve been taking a closer look at whether the SALT workarounds still make sense for our clients. And, like so many things in taxes, the answer is: it depends. Keep reading to see how the new limits could impact you and whether this strategy is still worth considering.
The SALT Deduction Cap Explained: Why Business Owners Pay Tax on Their Taxes
For many successful business owners, there comes a point when taxes quietly become their single largest expense. It's a frustrating reality, made even more so by a punitive rule that forces you to pay tax on your tax. The State and Local Tax (SALT) deduction cap means the federal government taxes you on money you already paid to your state—money that never even hit your pocket. Fortunately, a powerful, but often misunderstood, "workaround" exists specifically for business owners. This article will break down the five most surprising truths about this strategy.
The New $40,000 SALT Cap—and Why It Doesn’t Solve the Problem
This workaround exists for one reason: to correct the fundamental unfairness of the SALT cap. Imagine you earn $300,000 as a business owner and pay $30,000 in state income tax. Logically, you should be taxed by the federal government on the $270,000 you actually kept. Instead, the SALT cap limits how much of that state tax you can deduct, forcing you to pay federal taxes as if you kept most of that $30,000. It is a punitive situation that this strategy directly addresses.
"...you're paying tax to the federal government on money you already paid to the state. Like you didn't even get that money."
Who Qualifies for the SALT Workaround (and Who Doesn’t)
A common misconception is that the new, higher $40,000 SALT cap (up from $10,000) solves this problem for most business owners. In reality, that limit gets consumed much faster than you might think. The cap includes more than just your state income tax; property taxes on your primary residence and other local taxes like vehicle licensing all count toward that same $40,000 limit. For many, it's easy to exceed.
For high earners, the situation is even more acute. The $40,000 cap begins to phase down for those with an adjusted gross income (AGI) over $500,000, disappearing entirely and returning to the original $10,000 cap by the time AGI hits $600,000. This is where the workaround reveals its most potent strategic benefit: because it lowers your AGI, it can actually help you preserve more of your $40,000 personal cap for deducting things like property taxes.
This "Workaround" Is an Exclusive Perk for Business Owners
This strategy is not available to everyone. The two primary qualifications are having an S-corporation and operating in one of the 36 states that have adopted the workaround rules. This is explicitly not a strategy for high-income W-2 employees, no matter how high their state tax bill is. Consider it a strategic advantage earned through the risks of entrepreneurship—one that W-2 employees simply cannot access.
Deadlines Matter: State Rules and Timing for the SALT Workaround Election
The SALT workaround is a proactive planning strategy, not something you can fix when filing your taxes in April. It requires action during the tax year. Waiting until the following spring is too late, as the opportunity will have already passed.
"Tax planning for 2025 happens in 2025."
This creates a surprising sense of urgency because every state has different rules and deadlines. For example, New York's deadline to make the election is September 15th, while California's is June 1st and requires you to file the election and send in at least $1,000 to qualify. This highlights just how critical third and fourth-quarter planning is to avoid missing your state's window of opportunity.
The Business Owner’s Mindset: Turning Tax Planning Into a Strategic Advantage
Ultimately, the biggest takeaway isn't about the technical details but the psychological approach to taxes. Successful business owners reframe tax planning from a dreaded chore into an engaging challenge. The key is to "gamify" the process. Just like winning a complex game, winning at taxes isn't about one magic move. It’s about understanding the rules and using a combination of smart, coordinated strategies to achieve the best outcome. Once you have success as a business owner your number one expense becomes taxes. So if you want to play a little defense so you're not getting points scored on you from the IRS in your state that's tax planning.
Final Takeaway: Playing Offense With the SALT Workaround and Your Tax Bill
Viewing the SALT cap not as a tax problem but as a strategic challenge is the first step to keeping more of your money. The workaround isn't just a tactic; it's a shift from playing defense to going on offense with your single biggest expense. Now that you know the rules of the game, are you ready to 'gamify' your tax plan and play defense with your single biggest expense?
Reach out to schedule a complimentary consultation. We’ll explore your options, uncover potential savings, and chart a structure that puts you—and your business—on a path to sustainable growth.
