The issue

The Tax Cuts and Jobs Act enacted in 2017 imposed a $10,000 cap on the federal deduction of state and local taxes (SALT) for individual taxpayers. The One Big Beautiful Bill Act (OBBBA) increased the threshold to $40,000, subject to phasedown, beginning in tax year 2025 through 2029. For tax years beginning in 2030, the cap will revert to $10,000, or $5,000 for married filing separately.

For Pennsylvania owners of pass-through businesses such as partnerships and S corporations it has been a challenge. Because income from these entities is taxed at the individual owner level, those taxes are subject to the SALT deduction cap at the federal level. In Pennsylvania, that income is also subject to the Commonwealth’s 3.07% personal income tax.

Our position

The PICPA is urging state lawmakers to adopt legislation introduced by Doug Mastriano (R-Franklin) that would establish a revenue-neutral elective pass-through entity tax (PTET). Pennsylvania Senate Bill 396 would allow qualifying partnerships and S corporations to pay Pennsylvania income tax at the entity level rather than at the individual owner level. Because entity-level taxes are generally deductible for federal purposes, the election would enable many pass-through entity business owners to effectively bypass the federal SALT deduction limitation.

Enacting this legislation would align Pennsylvania with the majority of states that have already implemented similar workarounds. To date, 36 of the 41 states that impose a personal income tax have adopted comparable PTET provisions to help their taxpayers mitigate the impact of the federal SALT cap.

Status: Senate Bill 396 was reported out of the Senate Finance Committee on April 1, 2025, and is pending before the Senate Appropriations Committee. A companion measure, House Bill 1703, was introduced by Rep. Keith Greiner, CPA (R-Lancaster).

Reviewed June 2026