What the federal rules allow: deductions and SALT limits

• Individuals may deduct certain state and local taxes if they itemize, but the SALT deduction is capped. Beginning in 2025, OBBBA increases the “applicable limitation amount,” with a phasedown at higher modified AGI and a return to the $10,000 cap after 2029. These limits apply to deductions taken on Schedule A, not to properly deducted entity expenses § 164(b)(6); § 164(b)(7); Topic No. 503 — Deductible taxes.

• State and local taxes paid by an S corporation may be reflected in its federal return when properly deductible at the entity level, reducing non‑separately stated income that flows to owners via Schedule K‑1. Ensure tax payments and deductions are reported in accordance with Form 1120‑S instructions 2024 Instructions for Form 1120‑S.

OBBBA changed the individual SALT cap—here’s how that affects the analysis

• For taxable years beginning in 2025 and 2026, OBBBA increases the applicable limitation and introduces a phasedown based on modified AGI, with the cap reverting to $10,000 after 2029. These changes can increase itemized SALT capacity for some owners in 2025–2029, while higher‑income owners may still face a phasedown; after 2029, the lower cap generally returns § 164(b)(6); § 164(b)(7).

• Because properly deducted entity‑level taxes do not run through the owner’s Schedule A SALT cap, a PTE election can continue to produce federal savings for high‑income owners constrained by the phasedown (and broadly again starting in 2030 when the cap reverts) § 164; Topic No. 503 — Deductible taxes.

Who is eligible to benefit from a PTE election?

• S‑Corp with state nexus and taxable income: The S corporation must have state‑taxable income in jurisdictions offering an elective or mandatory PTE regime. If there’s little or no state taxable income, federal benefit is minimal 2024 Instructions for Form 1120‑S.

• Owners who pay state income tax on pass‑through income: In states that provide owner‑level relief (credit, exclusion, or deduction), a PTE election typically prevents double taxation while moving the deduction to the entity, potentially increasing the federal benefit versus a capped individual SALT deduction Topic No. 503 — Deductible taxes.

• High‑income owners facing SALT limits: Even with OBBBA’s higher cap in 2025–2029, phasedowns can apply. After 2029, the cap reverts to $10,000, and PTE elections commonly regain relative advantage for high earners § 164(b)(6); § 164(b)(7).

• Owners who take the standard deduction: Standard‑deduction filers gain no federal benefit from personal SALT payments, but properly deducted entity‑level taxes reduce K‑1 ordinary income, creating a federal benefit even when Schedule A isn’t used Topic No. 503 — Deductible taxes; 2024 Instructions for Form 1120‑S.

When does the election tend to help?

• High state tax rates on pass‑through income: The higher the rate applied to the S‑Corp’s income, the larger the potential federal deduction at the entity level (subject to proper reporting and timing) 2024 Instructions for Form 1120‑S.

• SALT‑cap constrained or non‑itemizing owners: Shifting tax to the entity can sidestep individual SALT limitations and standard‑deduction constraints at the owner level § 164(b)(6); Topic No. 503 — Deductible taxes.

• 2025–2029 transition years: OBBBA’s higher cap helps some filers, but phasedowns reduce benefits for higher incomes; PTE elections often recapture federal deductions otherwise lost to the cap, with broader applicability again after 2029 § 164(b)(6); § 164(b)(7).

Federal mechanics: how the deduction shows up

• Deducted at the entity: When properly deductible, state income taxes paid by the S‑Corp are reflected in computing the entity’s non‑separately stated income. The lower ordinary income passes through to shareholders via Schedule K‑1, rather than appearing as a shareholder‑level SALT item on Schedule A 2024 Instructions for Form 1120‑S.

• Not part of your individual SALT cap: Properly deducted entity taxes do not count toward the owner’s Schedule A SALT cap; the owner instead receives lower K‑1 ordinary income (and state owner‑level relief depends on state law) § 164(b)(6); Topic No. 503 — Deductible taxes.

• Year of payment: The deduction is generally taken by the entity in the tax year the entity pays the tax; timing (year‑end estimates vs. subsequent payments) affects the federal year in which the benefit arises and must be reflected consistently with Form 1120‑S instructions 2024 Instructions for Form 1120‑S.

Practical decision framework for S‑Corp owners

• Check state eligibility and owner relief: Confirm whether your state offers a PTE tax and how it provides owner‑level relief (credit, exclusion, or deduction). The federal benefit depends primarily on proper entity‑level deduction and accurate federal reporting 2024 Instructions for Form 1120‑S.

• Model federal impact: Compare (a) paying state tax personally and taking an itemized SALT deduction subject to § 164 caps, versus (b) electing PTE and deducting the tax at the entity. Run scenarios for 2025–2029 (higher cap/phasedown) and for years after 2029 (reverted $10,000 cap) § 164(b)(6); § 164(b)(7).

• Consider standard vs. itemized: Standard‑deduction filers often benefit more from an entity‑level deduction than from personal SALT payments, which confer no federal benefit if you do not itemize Topic No. 503 — Deductible taxes.

• Coordinate multi‑state elections: For multi‑state operations, evaluate each state separately; the federal deduction mechanics remain consistent, but owner‑level credits and apportionment vary by state 2024 Instructions for Form 1120‑S.

Compliance checklist

• Elect properly and pay at the entity level: Follow state election procedures (if elective) and ensure the S‑Corp pays the tax to claim the entity‑level deduction in the correct federal year 2024 Instructions for Form 1120‑S.

• Reflect deduction correctly on the federal return: Deduct the tax in computing non‑separately stated S‑Corp income in the year of payment; do not pass it through as a shareholder SALT item on Schedule A 2024 Instructions for Form 1120‑S.

• Track owner‑level state credits: Owners typically claim state credits or other relief for entity taxes; reconcile on personal returns to avoid double taxation under state law Topic No. 503 — Deductible taxes.

• Monitor OBBBA SALT cap rules for 2025–2029: Re‑run the PTE election math annually, especially during transition years and again starting 2030 when the cap returns to $10,000 § 164(b)(6); § 164(b)(7).

Bottom line

S‑Corp owners with meaningful state income tax on pass‑through earnings should model the PTE election annually, state by state. Under federal law, properly deducted entity‑level taxes reduce K‑1 ordinary income and do not count against the owner’s Schedule A SALT cap, while OBBBA’s temporary adjustments in 2025–2029 may increase itemized SALT capacity for some filers. The election often remains advantageous for high‑income owners facing phasedowns and becomes broadly advantageous again after 2029 when the SALT cap returns to $10,000. The right move is a yearly comparison of the individual SALT deduction under § 164 and the entity‑level deduction available via the PTE election, reflected correctly on Form 1120‑S and Schedule K‑1 § 164; Topic No. 503 — Deductible taxes; 2024 Instructions for Form 1120‑S.