Trump's tax bill could end popular 'SALT' deduction workaround for certain business owners

The House GOP's proposed tax bill, the "One Big Beautiful Bill Act," includes a higher SALT deduction limit of $40,000 that phases out above $500,000 in income and a boosted QBI deduction of 23%; however, it eliminates a popular state-level SALT cap workaround for certain pass-through business owners, specifically those classified as a "specified service trade or business" (SSTB) like doctors and lawyers. This change would prevent SSTBs from utilizing pass-through entity (PTE) level taxes to bypass the federal SALT deduction limit, potentially disadvantaging these businesses, according to the AICPA, while other non-SSTB pass-through businesses could benefit from both the increased QBI deduction and the SALT workaround.

Analysis

The House GOP's proposed "One Big Beautiful Bill Act" introduces significant modifications to federal tax deductions, notably by raising the State and Local Tax (SALT) deduction limit to $40,000, which would phase out for incomes exceeding $500,000, and by increasing the Qualified Business Income (QBI) deduction for pass-through businesses to 23%. A critical provision of this bill, however, is the proposed elimination of the widely utilized state-level SALT cap workaround—specifically the pass-through entity (PTE) tax—for Specified Service Trades or Businesses (SSTBs), such as doctors, lawyers, accountants, and financial advisors. Currently, 36 states and New York City offer these PTE workarounds, allowing pass-through business owners to bypass the $10,000 federal SALT deduction cap established by the 2017 Tax Cuts and Jobs Act. The American Institute of Certified Public Accountants (AICPA) warns that removing this workaround for SSTBs could place them at an unfair economic disadvantage, especially since many cannot organize as C corporations to mitigate this impact. Conversely, non-SSTB pass-through businesses might benefit from both the enhanced 23% QBI deduction and potentially continued access to an unlimited SALT deduction via the PTE workaround, a situation that has drawn criticism from entities like the NYU Tax Law Center regarding its potential fiscal cost. The overall sentiment surrounding these proposed changes is moderately negative and cautious, reflecting the adverse impact on SSTBs and fiscal concerns.

Key Decisions for Investors

• Closely monitor the Senate's debate on the "One Big Beautiful Bill Act," as proposed changes to SALT deductions and pass-through entity tax workarounds carry significant financial implications for specific business sectors and high-net-worth individuals.
• Investors should assess potential negative impacts on the after-tax profitability and valuation of Specified Service Trades or Businesses (SSTBs), such as professional services, legal, and healthcare practices, particularly those operating in high-tax states, if the current state-level SALT cap workaround is eliminated for them as proposed.
• Evaluate non-SSTB pass-through businesses for potential relative tax advantages stemming from the increased QBI deduction and potentially retained SALT workarounds, while remaining cognizant of the ongoing debate regarding the fiscal sustainability and fairness of these provisions.