Published Aug. 08, 2025 01:24AM EDT
The One Big Beautiful Bill is Limiting the PTE Workaround
The One Big Beautiful Bill appears likely to limit the ability of partners to get some relief from the SALT cap through the pass-through entity workaround. This workaround and credits, discussed in detail in our post here, allow partners to pay state income taxes at the entity level rather than on their personal return. This has the effect of reducing their taxable income at the federal level because federal law allows pass through entity to deduct taxes paid to states. Thirty-six states and one locality, New York City, have enacted legislation that allows entities within them to take advantage of this workaround.
House Legislation Eliminates Workaround for Professional Firms
In the 2025 tax legislation, the House imposed limits on this opportunity. Specifically, the House bill ends this work around for law, accounting, and consulting firms, as well as other specified trades or businesses (SSTBs). For other businesses, however, the workaround remains such that they will still be able to take full advantage of the workaround.
The Senate Imposes a Cap
The Senate’s first draft of the legislation, found here, does not adopt the House’s approach. Rather than eliminate the workaround entirely, the Senate’s legislation imposes a cap on the amount the PTE workaround can be used to reduce income reported from the entity. That cap is the greater of (i) $40,000 of the partner’s allocation of the PTE or (ii) 50 percent of the partner’s allocation of the PTE. The Senate’s proposal also is not limited to SSTBs and would apply to all pass-through entities.
Considerations for Tax Planning
The Senate’s legislation was just published this week and is likely to change. This issue is also closely tied to the SALT cap, which is a topic of heavy negotiations. It looks likely, though, that some limitation is going to be imposed on the PTE workaround. Any change would be made effective starting January 1, 2026. But if you are considering starting to take advantage of this workaround this year, these changes should be considered.
Mid-Atlantic Law & Tax PLLC will follow the issue closely. We are happy to work with you to analyze the tax impact this may have for you or your firm. Please reach out to us here or call us at 202-978-2888.
