SALT Deduction Secrets Revealed: How Service Entrepreneurs Can Claim $40K (What Your Current CPA Won't Tell You)

Most CPAs are still catching up to the 2025 SALT deduction changes. We're not. While they're filing the same old $10,000 SALT caps, service entrepreneurs who understand the new rules are claiming $40,000 in state and local tax deductions, quadruple what they could deduct just last year.

Here's what your current CPA probably hasn't told you: there's a massive window of opportunity right now, but it comes with income cliffs and strategic requirements that most tax preparers are completely missing.

The Quick Answer: $40K is Real, But There's a Catch

You can now deduct up to $40,000 in state and local taxes for 2025-2029, according to recent tax law changes. But this isn't automatic money, it requires meeting specific income thresholds, strategic itemization, and understanding pass-through entity workarounds that most traditional CPAs aren't implementing.

The biggest catch? Your adjusted gross income must stay at or below $500,000. Cross that line by even one dollar, and you're back to the old $10,000 cap. This makes income management your most critical tax strategy.

Why Most CPAs Are Missing This Opportunity

Traditional tax preparers are stuck in the old playbook. They're still thinking about the $10,000 SALT cap that existed from 2018-2024, and they haven't adapted their strategies to the new $40,000 opportunity window.

According to IRS guidance released for the 2025 tax year, the SALT deduction cap increases to $40,000 for taxpayers with AGI at or below $500,000, with a 1% annual inflation adjustment through 2029. After 2029, the cap reverts to $10,000 unless Congress acts.

But here's what gets missed: this isn't just about claiming more property taxes and state income taxes. Smart service entrepreneurs are using pass-through entity tax elections to bypass SALT limitations entirely while staying compliant with federal regulations.

The Income Cliff You Must Navigate

The $500,000 AGI threshold is a hard cliff, not a gradual phase-out. If you're a service entrepreneur making $499,000, you get the full $40,000 SALT deduction. Make $500,001, and you're back to $10,000.

This creates massive planning opportunities for business owners who can control their income timing:

Defer December client payments to January if you're approaching the threshold. That $15,000 project completed in December but paid in January could mean the difference between a $10,000 and $40,000 SALT deduction: worth up to $11,100 in tax savings at the highest marginal rates.

Accelerate business deductions into the current year to pull AGI below $500,000. Prepaying business expenses, maximizing retirement contributions, or purchasing qualifying equipment can strategically reduce your AGI while increasing your SALT deduction capacity.

The Itemization Requirement Most People Forget

You must itemize deductions to claim SALT, according to IRS Publication 17. For 2025, the standard deduction is $15,750 for single filers and $31,500 for married filing jointly.

This means your total itemized deductions: SALT plus mortgage interest, charitable contributions, and other qualifying expenses: must exceed these thresholds to make itemizing worthwhile.

Many service entrepreneurs assume they can't itemize because they don't have a mortgage. That's wrong. Business owners often have:

• Professional dues and memberships

• Home office expenses (for Schedule C filers)

• Investment management fees

• State tax preparation fees

• Charitable contributions

Combined with the new $40,000 SALT allowance, these expenses easily push most entrepreneurs over the standard deduction threshold.

The Pass-Through Entity Strategy Your CPA Should Know

Here's the advanced move most CPAs aren't implementing: if you operate as an S-corp, partnership, or multi-member LLC, you can elect pass-through entity tax (PTET) status in many states.

Under IRS Notice 2020-75, your business can pay state income taxes at the entity level, then pass through a state tax credit to you personally. The business deducts the full state tax payment as a business expense on its federal return, completely bypassing individual SALT limitations.

This strategy works even with the new $40,000 cap because you're converting non-deductible personal state taxes into fully deductible business expenses. For high-income service entrepreneurs, this can mean deducting state taxes that would otherwise be completely non-deductible under federal rules.

Real-World Planning for Service Entrepreneurs

Scenario 1: The Consultant at $480,000 AGI You're a management consultant with $480,000 in AGI, $15,000 in state income taxes, and $8,000 in property taxes. You're well under the $500,000 threshold, so you qualify for the full $40,000 SALT cap. Your $23,000 in actual SALT taxes gets fully deducted, saving you up to $8,510 at the 37% marginal rate.

Scenario 2: The Service Business Owner at $520,000 AGI You run a digital marketing agency with $520,000 AGI: over the threshold. Without planning, you're limited to $10,000 SALT deduction. But if you elect S-corp status and PTET, your business can pay $25,000 in state taxes at the entity level, deducting the full amount federally while you receive offsetting state credits.

Scenario 3: The Professional at $495,000 AGI You're an attorney with $495,000 AGI and expect a $20,000 year-end bonus. Without intervention, that bonus pushes you over $500,000, costing you $30,000 in SALT deduction capacity. Strategic move: maximize your Solo 401(k) contribution or defer the bonus to January, keeping you under the threshold.

Strategic Income Management Techniques

The key to maximizing your SALT deduction is controlling your AGI throughout the year, not just at year-end. Service entrepreneurs have unique flexibility because you often control when income hits your books.

Accelerate deductible expenses like equipment purchases, professional development, or business travel into the current year. These reduce AGI directly while providing legitimate business benefits.

Time your retirement contributions strategically. SEP-IRA contributions can be made up until your tax filing deadline (including extensions), giving you flexibility to optimize AGI after you know your final income numbers.

Consider Roth conversion strategies in low-income years. If you're significantly below the $500,000 threshold, converting traditional IRA assets to Roth may make sense, especially if you expect higher income in future years.

The Compliance Foundation You Can't Skip

All SALT deduction strategies must comply with IRS regulations and state requirements. According to IRS Publication 535, business expense deductions must be ordinary and necessary for your trade or business. State tax payments must be properly substantiated with official documentation.

For pass-through entity elections, you must file the appropriate state forms and meet deadlines that vary by state. Connecticut, for example, requires PTET elections by the original due date of the entity's tax return, per CT DRS guidance.

Documentation is critical. Keep records of all state tax payments, property tax bills, and business expense receipts. The IRS can audit SALT deductions, especially larger amounts that might seem unusual for your income level.

Why This Window Won't Last Forever

The $40,000 SALT cap expires after 2029 unless Congress extends it. The original $10,000 cap returns in 2030, making 2025-2029 a limited opportunity window for maximizing state and local tax deductions.

Smart service entrepreneurs are implementing these strategies now rather than waiting for year-end panic planning. The earlier you start, the more control you have over income timing and deduction optimization.

Take Action Before December 31st

Time is running out to implement these strategies for 2025. Income deferral, expense acceleration, and pass-through entity elections all require planning and execution before year-end.

If you want tax planning that actually saves you money instead of just filing last year's mistakes, it's time to work with advisors who understand these advanced strategies. Book a strategy session with our team to see exactly how much the new SALT rules can save your service business: and what you need to do before December 31st to claim every dollar you're entitled to.

Most entrepreneurs leave money on the table because their current CPA isn't staying current with tax law changes. Don't let that be you.