Up until OBBBA, we consistently had conversations with clients about the downside of operating a business as a single-member LLC when conducting business in a state that had a passthrough entity (“PTE”) tax workaround statute [a statute that provides for state income tax to be paid at the entity level (for which a state income tax credit is provided at the owner level), thereby generating a deduction for federal income purposes not subject to the SALT limitation]. Profits generated by a single-member LLC owned by an individual are reported on Schedule C (Schedule E in the case of rental real estate) and are not eligible for a PTE deduction at the entity level. Consequently, absent generating little profit or a loss, it generally made sense for the owner of the single-member LLC to admit another member into the LLC (e.g., a spouse or a trust for a descendant) to become PTE eligible. In fact, many tax professionals are comfortable with a client making deductible PTE payments from an investment partnership, a topic for another day.

Most of you probably are aware of OBBBA increasing the itemized deduction cap for SALT payments to $40,000, as long as the taxpayer is below certain taxable income thresholds. After the passage of OBBBA, we had a conversation with a new business client (whose personal income was projected to be below the SALT phase-out level) about the merits of structuring his new business venture to take advantage of the PTE tax deduction. The client responded that he wasn’t concerned, because he would be obtaining all the necessary state income tax deductions as a result of the increase in the SALT cap (at least until the end of 2029 when the cap is scheduled to revert back to $10,000). We then pushed him harder and found out that he and his spouse projected that they would have the following itemized deductions:

Real estate taxes	$10,000
Projected state income tax from business	$25,000
Projected state income tax from investments	$  5,000
Charitable contributions	$  1,000

We then informed the client that, yes, he and his spouse would be able to deduct all $40,000 of state and local taxes as itemized deductions as a result of the new SALT cap. However, we then advised the client that taking advantage of the PTE deduction would net him a $25,000 above-the-line deduction from business income (and, in some instances, a reduction in income subject to SE tax), and that he also would be entitled to the standard deduction of $30,000 and the new above-the-line charitable contribution deduction (beginning in 2026) of $1,000, for aggregate deductions of $56,000. The client then smiled, said thank you and asked how his new business should be structured to avail himself of PTE benefits.

PTE structuring by partnerships is an important consideration, and it is a topic that we commonly cover at our Tax Planning Forum programs. All our fall and winter programs will cover the OBBBA changes impacting flow-through entities, as will our Fundamentals programs to the extent any OBBBA change impacts “fundamental” flow-through concepts. Registration for all our virtual and in-person programs is open, and you may want to register now to take advantage of our early-bird discount that expires on July 31st.