How LLC Owners Save on Taxes in 2026

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Tax Strategy • §164 / §164(b)(6)

SALT Deduction — State and Local Tax

The $10,000 SALT cap under TCJA limits individual deductions for state income, property, and sales taxes — but pass-through entity (PTE) tax elections offer a workaround for business owners in most states.

$10,000SALT cap per return (2026, TCJA)

The State and Local Tax (SALT) deduction under §164 allows taxpayers to deduct state and local income taxes, property taxes, and (if elected) sales taxes paid during the year. The Tax Cuts and Jobs Act of 2017 capped this deduction at $10,000 per return ($5,000 for married filing separately) through 2025 — a cap that was extended under current law through 2028. For high-income taxpayers in high-tax states (California, New York, New Jersey, Illinois), the SALT cap can eliminate tens of thousands of dollars in previously deductible taxes, significantly increasing federal taxable income.

What the SALT Deduction Covers

Under §164, the SALT deduction includes:

Tax TypeDeductible?Notes
State income tax (or general sales tax, if elected)YesMust choose income tax OR sales tax — not both
Local income taxYesCity/county income taxes included
State and local real property taxYesOn personal residence and investment property
State and local personal property taxYesOnly if based on value of property (e.g., vehicle registration in some states)
Foreign income taxesNo (§164(b)(6))Must use foreign tax credit (Form 1116) instead

The $10,000 cap applies to the combined total of all state and local taxes — income, property, and sales taxes combined cannot exceed $10,000 on Schedule A.

Pass-Through Entity (PTE) Tax Election — The SALT Cap Workaround

The IRS Notice 2020-75 confirmed that states may impose an entity-level income tax on pass-through entities (S-Corps, partnerships, LLCs taxed as partnerships), and that the entity-level tax is deductible by the entity as a business expense — bypassing the $10,000 individual SALT cap entirely. As of 2026, 36+ states have enacted PTE tax elections.

How it works:

  1. The S-Corp or partnership elects to pay state income tax at the entity level.
  2. The entity deducts the PTE tax as a business expense, reducing federal taxable income for all owners.
  3. Each owner receives a state tax credit (typically dollar-for-dollar) on their individual state return, offsetting the state tax they would have owed personally.
  4. Net result: the owner gets a federal deduction for state taxes paid — effectively circumventing the $10,000 SALT cap.
StatePTE Election AvailableCredit Type
CaliforniaYes (PTET)Dollar-for-dollar credit
New YorkYes (PTET)Dollar-for-dollar credit
New JerseyYes (BAIT)Dollar-for-dollar credit
IllinoisYesDollar-for-dollar credit
TexasNo state income taxN/A

SALT Cap and the Alternative Minimum Tax (AMT)

Prior to TCJA, the SALT deduction was one of the primary AMT preference items — meaning high SALT deductions often triggered AMT liability. The TCJA's $10,000 cap paradoxically reduced AMT exposure for many taxpayers by limiting the SALT deduction on the regular tax return, making the AMT less likely to apply. Taxpayers in high-tax states who previously owed AMT may find their AMT liability reduced or eliminated under the cap.

However, the PTE tax election (described above) restores the effective SALT deduction through the business deduction channel — and this business deduction is not subject to AMT add-back because it is a legitimate business expense under §162, not a personal itemized deduction preference item.

SALT Cap Sunset and Legislative Outlook

The TCJA SALT cap of $10,000 was originally set to are now permanent under OBBBA (P.L. 119-21). Under current law as of 2026, the cap has been extended. Legislative proposals to raise or eliminate the cap have been introduced in Congress but have not been enacted. Taxpayers in high-tax states should plan conservatively around the $10,000 cap remaining in place and maximize the PTE election workaround where available.

Frequently Asked Questions

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More Tax Planning FAQs

What is the S-Corp election and how does it reduce self-employment tax?
An S-Corp election allows the owner to split income between a reasonable salary (subject to 15.3% FICA) and distributions (not subject to FICA). For a business owner with $200,000 in net profit paying an $80,000 salary, the annual SE tax savings are approximately $15,500–$18,500. The S-Corp must file Form 2553 within 75 days of formation.
What is the Section 199A QBI deduction and how does it apply?
The §199A deduction allows pass-through business owners to deduct up to 23% of qualified business income (QBI) from taxable income under OBBBA. For taxpayers above $403,500 (MFJ) in 2026, the deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property.
What retirement plan options are available for self-employed professionals?
Self-employed professionals can establish a Solo 401(k) (up to $70,000 in 2026), a SEP-IRA (25% of net self-employment income up to $70,000), a SIMPLE IRA ($16,500 + $3,500 catch-up), or a Defined Benefit Plan (up to $280,000+ depending on age). The Solo 401(k) is the best option for most self-employed professionals.
How does the home office deduction work for self-employed professionals?
Self-employed professionals who use a dedicated home office space exclusively and regularly for business qualify for the home office deduction under §280A. The deduction is calculated as a percentage of home expenses equal to the office square footage divided by total home square footage. The simplified method allows $5/sq ft up to 300 sq ft ($1,500 maximum).
What vehicle deductions are available for self-employed professionals?
Self-employed professionals can deduct vehicle expenses using either the standard mileage rate (70 cents/mile in 2026) or actual expenses. Vehicles with a GVWR over 6,000 lbs qualify for §179 expensing and bonus depreciation without luxury auto limits. A mileage log must be maintained for either method.
What is the Augusta Rule and how can it benefit business owners?
The Augusta Rule (§280A(g)) allows homeowners to rent their primary or secondary residence to their business for up to 14 days per year. The rental income is completely tax-free to the homeowner, and the business deducts the rent as a business expense. At $2,000–$3,000/day for 14 days, this strategy generates $28,000–$42,000 of tax-free income.
How does cost segregation apply to business owners who own real estate?
Cost segregation reclassifies building components into shorter depreciation categories eligible for bonus depreciation. For a $1M commercial property, cost segregation typically identifies $150,000–$250,000 of accelerated depreciation, generating $60,000–$100,000 in first-year deductions at the 100% bonus depreciation (restored by OBBBA for property placed in service after Jan 19, 2025) rate in 2026.
What is the self-employed health insurance deduction?
Self-employed professionals can deduct 100% of health insurance premiums (for themselves, their spouse, and dependents) as an above-the-line deduction under §162(l). This deduction reduces AGI and is available even if the taxpayer does not itemize. S-Corp owners must include premiums in W-2 wages before claiming the deduction.
How should a self-employed professional handle estimated tax payments?
Self-employed professionals must make quarterly estimated tax payments by April 15, June 15, September 15, and January 15. The safe harbor is 100% of prior year tax (110% if prior year AGI exceeded $150,000). Failure to pay sufficient estimated taxes results in an underpayment penalty under §6654.
How do I set up a strategy to maximize the SALT deduction within the $10,000 cap for 2026?
To maximize the SALT deduction under the $10,000 cap effective for 2026, first aggregate all state and local taxes paid, including property, income, and sales taxes where applicable. Evaluate timing strategies such as accelerating deductible payments into the current tax year or using estimated payments to optimize the $10,000 limit per filing status. For pass-through entities, consider structuring income and deductions to leverage potential state-level tax credits or entity-level taxes that may be deductible, while monitoring the impact of §164 restrictions. Consult state-specific rules, as some states offer workarounds like entity-level taxes that can bypass the SALT cap.
What are the key compliance steps to document SALT deductions properly to withstand an IRS audit?
Proper documentation of SALT deductions is critical to avoid audit adjustments. Maintain detailed records of all state and local tax payments, including property tax bills, state income tax returns, and payment confirmations. For pass-through entities, retain documentation showing the allocation of state taxes paid at the entity level and how these amounts flow through to individual owners. Ensure clarity on the nature of each tax to confirm it qualifies under §164 as a deductible state or local tax. Additionally, reconcile SALT deductions with the amounts reported on state returns and federal forms to substantiate the deduction during IRS examination.
When should taxpayers file amended returns to claim or adjust SALT deductions for prior years considering the cap?
Taxpayers may consider filing amended returns within the three-year statute of limitations if they discover missed SALT deductions or errors in applying the $10,000 cap. For 2026 and prior years, review whether additional state or local tax payments were made that could increase the deduction or if prior allocations between property and income taxes were incorrect. Amended returns should clearly explain adjustments and include supportive documentation to justify the change. However, be mindful that changes affecting other credits or deductions may trigger further review, so coordinate with broader tax positions.
What triggers an IRS audit specifically related to SALT deductions and how can risk be mitigated?
IRS audits related to SALT deductions often arise from discrepancies between reported state and local tax payments and amounts claimed, especially when taxpayers claim deductions close to or exceeding the $10,000 cap. Unusual patterns such as excessive property tax deductions relative to assessed values or inconsistent treatment of entity-level taxes may also prompt scrutiny. Risk mitigation includes meticulous recordkeeping, consistent treatment of SALT items across returns, and avoiding aggressive strategies that lack clear statutory support. Utilizing professional advice when navigating complex state-local tax interactions helps ensure compliance and reduce audit exposure.
How does the SALT deduction limit interact with state-level entity taxes for S corporations and partnerships?
State-level entity taxes imposed on S corporations and partnerships can sometimes be deducted at the entity level, potentially circumventing the $10,000 SALT cap imposed on individuals. Many states, including California, have enacted elective pass-through entity taxes that allow the entity to pay state income taxes directly, which the entity deducts as a business expense. This mechanism under §164(a) enables owners to benefit indirectly from a full deduction before income flows through to individual returns. Careful election and compliance with state rules are essential, and practitioners should evaluate each client’s circumstances to determine if the entity-level tax election is advantageous.
Can a taxpayer combine SALT deductions from multiple states and localities, or are there separate caps per jurisdiction?
The SALT deduction cap of $10,000 for 2026 applies on a per-taxpayer basis at the federal level, not per state or locality. This means that taxpayers must aggregate all deductible state and local income, property, and sales taxes paid across all jurisdictions and then apply the single $10,000 cap. There is no separate cap for each state or locality; thus, taxpayers cannot separately deduct $10,000 for California taxes and another $10,000 for New York taxes, for example. This aggregation requirement makes multi-state tax planning essential, especially for clients with exposure to high-tax states.
What questions should I ask my client to accurately assess their SALT deduction opportunities and limitations?
To accurately assess SALT deduction opportunities, ask clients about all states and localities where they own property, conduct business, or earn income, including out-of-state investments. Inquire about the timing and amounts of state and local tax payments, including estimated taxes and any entity-level taxes paid if involved with pass-through entities. Clarify whether they have made any elections for pass-through entity taxes or other state-specific SALT workarounds. Also, determine their filing status and whether they itemize deductions or take the standard deduction, as this affects SALT deduction utility. Finally, gather information on any changes in residency or property ownership during the year that could impact deductible amounts.

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