2026 State and Local Tax (SALT) Cap, Pass-Through Entity Tax (PTET) & Remote WorkThe Tax Plot Twist You Didn't Ask For

9/28/2026 - By Michael Cole, JD, MSPA & Stacey Craig, CPA

Saltmarsh Summary

  • The 2026 SALT deduction cap increases to $40,400, but higher-income taxpayers may see the deduction phase down based on modified adjusted gross income (MAGI).
  • PTET elections continue to be a valuable planning strategy for many partnerships and S corporations by shifting eligible state taxes to the entity level, potentially preserving federal tax deductions.
  • Businesses with remote employees should evaluate whether expanded operations have created new multistate filing requirements, PTET election opportunities, or additional compliance obligations.
  • Because PTET elections, filing requirements, and tax rules vary by state, proactive planning is essential to maximize tax savings while maintaining compliance.

A plain-English guide to the bigger 2026 State and Local Taxes (SALT) cap, why Pass-Through Entity Tax (PTET) still matters, and how one remote employee can turn into a multistate filing adventure.

What Is the 2026 SALT Deduction Cap?

At the highest level, IRC section 7164 is the rule that lets you deduct certain state and local taxes. It covers the usual suspects (state income tax and property tax), and it also recognizes that some taxes belong in the business bucket (for example, taxes tied to operating a trade or business) rather than your personal itemized deductions.

The catch: for individuals, IRC section 164(b)(6) caps how much of your personal state and local taxes you can count as an itemized deduction (the “SALT cap”). The cap generally applies to state and local income taxes and property taxes that would otherwise be deductible on Schedule A. It generally does not apply to taxes that are properly deducted at the entity/business level (or under section 162/section 212 rules), and it also has special rules for certain foreign taxes.

Here are the headline numbers for 2026:

  • Base SALT cap: \$40,400 (IRC section 164(b)(7)(A)(ii)).
  • Phase-down starts at: modified AGI over $505,000 (IRC section 64(b)(7)(B)(ii)(II)).
  • Phase-down rate: reduce the cap by 30% of the excess MAGI over the threshold (IRC section 164(b)(7)(B)(i)).
  • Floor: the phase-down can’t push the cap below $10,000 (IRC section 164(b)(7)(B)(iii)).
  • Married filing separately (per summary materials): cap $20,200; threshold $252,500; floor $5,000.

For this SALT phase-down, “modified AGI” is basically AGI plus certain excluded income amounts (for example, exclusions under IRC sections 911, 931, and 933). If you’re near the threshold, the exact MAGI calculation matters because it determines how quickly the $40,400 cap shrinks.

Yes, the 2026 cap is much higher than the old $10,000 amount but higher-income taxpayers can still watch it phase down fast, and it never phases below the statutory floor.

One more speed bump: the itemized deduction limitation (IRC section 68)

Starting in 2026, there’s also a separate limitation under amended IRC section 68 that can reduce the benefit of itemized deductions for higher-income taxpayers. It’s not the SALT cap, and you have to watch both if you’re modeling the real after-tax effect.

What Is a Pass-Through Entity Tax (PTET)?

PTET (pass-through entity tax) regimes are states’ way of moving some state income tax from the owner level to the entity level for partnerships and S corporations. The goal is simple: get a federal deduction at the entity level that isn’t trapped by the owner’s SALT cap.

The basic federal hook is that the SALT cap is aimed at personal itemized deductions. Taxes that are properly paid (and deducted) in carrying on a trade or business generally sit outside that capped basket.

Mechanically, many states let the partnership or S corporation elect to pay an entity-level income tax. Owners then typically receive a state credit (or exclusion) so they aren’t taxed twice. The intended federal result is that the PTET reduces ordinary/business income at the entity level instead of showing up as an owner-level, SALT-capped itemized deduction.

The fine print (because of course there’s fine print)

In practice, PTET is widely relied on. Notice 2020-75 announced the IRS’s intent to issue regulations allowing partnerships and S corporations to deduct certain entity-level state and local income taxes when computing non-separately stated income, without applying the SALT cap at the entity or owner level. That said, the federal analysis can still get technical, and some aspects have been described as complex or unsettled.

Why the technical hair-splitting? For partnerships (and similarly for S corporations), whether something reduces ordinary income or must be separately stated can affect how it flows to owners. A commonly cited “stronger” position is where the PTET is imposed on income from an operating trade or business conducted by the entity. The case can be less clear when the PTET is tied to nonbusiness activity (for example, pure investment activity under IRC section 212).

Practical takeaways:

  • PTET is generally intended to mitigate the owner-level SALT cap for owners of partnerships and S corporations.
  • The cleanest fact pattern is an entity-level tax imposed directly on an operating trade or business.
  • The approach is widely used, but parts of the federal characterization can be nuanced.

PTET & the Section 199A Qualified Business Income Deduction

One important modeling point: if state and local income taxes are allocable to qualified trade or business income, they may reduce QBI, potentially reducing the section 199A deduction. In other words, PTET can improve your SALT outcome while slightly shrinking QBI.

For 2026, section 199A remains in play, and recent legislative changes increased certain thresholds and added a minimum deduction concept for active QBI. Bottom line: PTET planning is rarely “one variable” it can ripple into other federal calculations.

How Remote Employees Can Create Multistate Tax Obligations

Remote work doesn’t change the federal SALT cap itself but it can change where a business has state tax filing obligations. The specifics are state-dependent, and this document isn’t a 50-state nexus treatise. The practical point is that once a state filing obligation exists, the compliance “stack” can expand quickly (entity returns, withholding, composite filings, PTET elections, owner credits, and more).

Entity-level consequences (Form 1065 partnerships and Form 1120-S S corporations)

If employees are working in additional states, the partnership or S corporation may need to register and file returns in those states. And once you’re filing, many states layer on PTET election choices—with their own deadlines, rate structures, forms, and opt-in/opt-out mechanics.

Examples (purely to show how different the rules can be):

  • California: has a PTET election with specific timing and forms (including a June 15 election/payment process in the survey materials).
  • New York / New York City: each have PTET elections, generally due March 15, made through online business accounts.
  • Connecticut, Massachusetts, New Jersey, New York (and others): have entity-level regimes, but election mechanics and owner opt-out rules differ materially.
  • Partnership return due dates vary by state: many use March 15 for calendar-year filers, but some use later dates (for example April 15/20/30 or May 15) or tie to the federal deadline.

The compliance chain reaction often looks like this:

  1. Possible new state nexus or filing presence.
  2. New entity return filing obligations.
  3. PTET election decisions (where available) and related deadlines.
  4. Estimated tax and payment mechanics.
  5. K-1 reporting updates and state credit reporting for owners.

This can apply to both partnerships and S corporations. The due-date survey cited here focuses on partnership returns, but the broader “more states = more filings” theme applies across pass-throughs.

Owner-level consequences (more returns, more credits, more SALT pressure)

When the business footprint expands, owners often end up filing more nonresident returns and/or claiming resident credits for taxes paid to other states. That’s exactly when the SALT cap becomes more than a headline—because those owner-level state income taxes generally live inside the capped section 164(b)(6) basket unless shifted to the entity level through PTET (or otherwise treated as business-level taxes).

  • Without PTET: more multistate owner-level tax can mean more tax trapped under the SALT cap.
  • With PTET: some of that burden may shift to the entity level, potentially preserving federal deductibility (subject to the technical caveats above).

Multistate Tax Considerations for Partnerships (Form 1065) & S Corporations (Form 1120-S)

For partnerships, the SALT cap is usually an owner-level problem (individuals, estates, and trusts). PTET planning tends to show up here because the partnership can potentially claim an entity-level deduction that changes what flows through on the K-1.

If remote work creates new state filing obligations, due dates can vary by jurisdiction. Examples for calendar-year partnerships from the survey materials include:

  • Many states: March 15
  • Some states: April 15
  • Hawaii: April 20
  • Iowa: April 30
  • Louisiana: May 15
  • Some states: tie the due date to the federal deadline

S corporations (Form 1120-S)

Many PTET regimes also apply to S corporations. That can be especially helpful because shareholder-level state income taxes are otherwise personal taxes that can run into the SALT cap.

The remote-worker dynamic is similar: additional states can mean additional filings and PTET election decisions. The materials referenced here don’t include a separate state-by-state due-date survey for S corporation returns, so due dates should be confirmed per jurisdiction.

PTET vs. Franchise Tax: What Is the Difference?

PTET is different from franchise tax because PTET is a special, usually elective, income-based tax imposed on partnerships and S corporations as pass-through entities and is generally paired with an owner-level credit or refund mechanism.

Franchise tax, by contrast, is a separate state tax imposed under the state’s franchise or business tax regime and is generally an entity-level cost rather than a direct owner-credit mechanism.

For owners, PTET is usually intended to shift state tax burden to the entity while preserving a state credit at the owner level and reducing federal pass-through income; franchise tax generally does not serve that same function. The exact interaction depends on the state, but the sources consistently treat PTET and franchise tax as distinct taxes that may both apply to the same pass-through entity.

Key Takeaways for 2026 SALT & PTET Planning

  • 2026 SALT cap: $40,400, with a phase-down above $505,000 MAGI and a $10,000 floor (and lower MFS amounts per summary materials).
  • PTET is still the main workaround for many partnership and S corporation owners because an entity-level tax imposed on the business can sit outside the owner-level SALT cap framework.
  • PTET is not “set it and forget it”: election deadlines, forms, rates, and owner opt-out rules vary widely by state.
  • Remote workers can expand the compliance footprint: more states can mean more entity filings, more PTET decisions, and more owner-level returns/credits.
  • Watch interactions: PTET may help on SALT but can reduce section 199A QBI in some cases.

In 2026, IRC section 164 generally caps an individual’s deduction for specified state and local taxes at $40,400, with a phase-down for modified AGI over $505,000 and a $10,000 floor (with lower amounts for married filing separately reflected in summary materials).

PTET elections can materially soften that limit for owners of partnerships and S corporations by moving state tax to the entity level—but the federal footing is generally strongest where the tax is imposed directly on an operating trade or business, and the analysis can be nuanced.

If you’re planning around this, here’s the quick checklist: 

  1. Estimate your 2026 SALT cap after the MAGI phase-down.
  2. Inventory which states you file in (especially with remote employees).
  3. Confirm PTET eligibility/election deadlines per state.
  4. Model the PTET impact on both SALT and §199A QBI.

How Saltmarsh Can Help

Whether you're preparing for the higher 2026 SALT cap, evaluating a PTET election, or navigating multistate tax obligations, Saltmarsh's tax professionals can help you assess your options and develop a strategy tailored to your business. Contact our tax team to discuss how these changes may affect your organization and identify planning opportunities before year-end.

About the Authors

Michael Cole, JD, MSPA

Michael is a partner with experience across tax, accounting, and advisory services. He began his career in public accounting over 15 years ago, focusing on tax consulting and compliance. His primary areas of experience include providing services related to mergers and acquisitions, 704(b) allocations, and complex transaction structuring for private equity firms and family offices.

Stacey Craig, CPA

Stacey is a partner with experience across tax compliance, planning, and consulting services. Stacey is a trusted tax advisor known for delivering clear, strategic guidance that helps clients make confident financial decisions. With more than two decades of experience in tax compliance, planning, and consulting, she brings deep expertise to partnerships, S corporations, nonprofits, high-net-worth individuals, trusts, and estates.

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