S Corp SALT Strategy 2025
Navigating the fractured landscape of State and Local Tax: PTE Elections, Nexus Traps, and the OBBBA impact.
Executive Summary
State tax compliance for S Corporations has become a "mosaic of divergence." The federal OBBBA raised the SALT cap to $40,000, altering the math for Pass-Through Entity (PTE) elections. Meanwhile, states are aggressively expanding Economic Nexus to tax out-of-state businesses based on "internet activities" like cookies.
Success in 2025 requires managing State Conformity gaps (like California's refusal to adopt federal depreciation) and leveraging PTE taxes to bypass federal deduction limits.
The Opportunity
The Threat
The Gap
PTE Tax Elections
The "Workaround" Explained
OBBBA Impact (2025)
The OBBBA raised the individual SALT cap to $40,000. Does PTE still matter?
- Yes, for High Earners: If your state tax bill is >$40k, PTE saves money.
- Yes, for Phase-Outs: The $40k cap phases out for incomes >$500k. PTE has no phase-out.
Key State Rules
Nexus & P.L. 86-272
Erosion of Federal Protection
Public Law 86-272 used to protect sellers of goods from income tax if they had no physical presence. States (via the MTC) now say these digital actions void that protection:
State Conformity Traps
States don't always follow federal rules. "Static Conformity" states are stuck in the past.
| State | Type | Key Trap |
|---|---|---|
| California | Static (2025 Date) | Updated via SB 711, but NO Bonus Depreciation. |
| New York | Rolling | Generally follows Fed, but decouples from specific provisions. |
| Texas | Non-Conforming | No Income Tax. Uses Margin Tax (Gross Receipts based). |
| Alabama | Rolling | Decoupled from Sec 174. Allows immediate R&E expensing. |
Interactive: PTE Benefit Calculator
Estimate the federal tax savings of making a PTE election versus relying on the individual SALT deduction.
Tax Assumptions
E.g., CA is 9.3%, NY varies.
Property tax, income tax from other sources.