SALT Workaround Used by Doctors, Lawyers Axed in GOP Tax Bill

House Republicans’ bill to extend and expand Trump’s 2017 tax law would also raise revenue by cutting many professional service providers out of using state workarounds for the cap on state and local tax deductions.

Professional groups, including the American Institute of CPAs, are already asking for changes that would restore the value of pass-through entity tax regimes that became popular in 36 states and New York City after the 2017 law put a $10,000 limit on state and local tax payments that can be deducted from individuals’ federal returns.

These tax strategies give partnerships and S corporations the option to pay state and local taxes at the entity level, instead of having individual members pay as they normally would, and thus help the individuals avoid the SALT limit.

Melanie Lauridsen, vice president for tax policy at AICPA, said the House proposal, approved in a Ways and Means Committee vote Wednesday, was drafted to exclude businesses characterized as a “specified service trade or business” from using PTET workarounds to minimize their members’ federal tax obligations. This change in policy, if implemented, would boost taxes for millions of businesses providing accounting, legal, consulting, medical, and financial services, she said.

“It’s very targeted and puts pass-throughs in a service industry at a worse position,” Lauridsen said. “This isn’t just an accounting issue. It’s all service businesses—doctors, dentists, lawyers—industries where knowledge is the service being offered.”

Additionally, the proposal exacerbates disparities in the way C corporations and pass-through entities are treated under the federal tax code, said Mark Koziel, the institute’s president and chief executive officer.

“We remain deeply troubled by the proposed changes to the PTET deduction,” Koziel said in a statement. “The changes to this vital deduction are unfair to businesses that are the backbone of the American economy, which include accounting firms, medical offices and Main Street businesses, of which the majority are structured as pass-throughs.”

Raising Revenue

By reducing eligibility for state pass-throughs, House tax writers would raise some revenue by squeezing between 35% and 40% of the tax benefits out of the state programs, said Kyle Pomerleau, a federal tax policy senior fellow at the American Enterprise Institute.

The PTET proposal hasn’t been scored by the nonpartisan Joint Committee on Taxation, but Pomerleau estimated the federal government could pick up $7 billion annually by cutting the eligibility requirements. Last year he estimated full elimination of PTETs would raise $20 billion in 2026, and roughly $200 billion over a decade.

Pomerleau noted that tax writers are offering service providers impacted by the change a benefit in the form of a higher SALT cap for individuals, pegged at $30,000. That number could change, however, with several House Republicans from high-tax states like New York and California objecting. In addition, the qualified business income deduction for pass-throughs, under Section 199A, would become permanent and boosted from 20% to 23%.

Still, many pass-through businesses would find themselves in a worse tax position, he said.

“There is a little carrot and a little stick,” Pomerleau said. “The carrot to stay out of the programs is that the cap is a little higher. So the $30,000 cap for a married couple might keep you out of one of these state workaround programs—that’s the carrot. And then the stick is the restriction that says if you are specified service business, you are not allowed to use this. Overall, I think the stick is going to do a lot more work than the carrot.”

It is unclear how states might respond if the federal ground rules change beginning in 2026. At a minimum, 10 states would need to extend their PTET programs because the proposed law wouldn’t fully eliminate workarounds. California, Colorado, Iowa, Illinois, Massachusetts, Michigan, Minnesota, Oregon, Utah, and Virginia have all structured their programs to end if the SALT deduction cap is repealed or expires.

California Department of Finance Director Joe Stephenshaw said his state is moving forward on an extension and studying how the revised SALT cap would affect state taxpayers. He made his remarks Wednesday during a news conference presenting an updated budget plan for the next fiscal year.

“We are still evaluating what the impacts from DC might be and at some point we may have to make some adjustments,” he said.