What to Know About the SALT Cap Workaround

Contributing authors: Nick Prelog, Nick Murray, Victoria King, Mathew Prentice, Kerry Morton, Blake Seabaugh, and Sean Wallace

Many states provide means to deduct additional state and local taxes for federal tax purposes, but complexity reigns.

When the 2017 Tax Cuts & Jobs Act was enacted, one notable provision was the limiting of itemized deductions for state and local taxes (SALT) to $10,000 through 2025. This cap created a particular disadvantage for taxpayers in high-tax states, including Oregon and California. State legislatures quickly began to look at strategies to allow individuals to bypass this cap for the benefit of their residents. The result has been many states instituting a state and local tax (SALT) workaround tax.

The details of these SALT workaround statutes vary greatly from state to state, but the objective is the same. Generally, the workarounds impose state tax at the pass-through entity (PTE) level, and then the PTE owners receive a state tax credit, or deduction, on their personal returns. Those PTE state taxes reduce the owner’s share of federal taxable income, and the owner’s state tax obligation is reduced by the credit or deduction.

In late 2020, the IRS issued Notice 2020-75 that by and large ‘blessed’ the PTE taxes as a workaround for individual owners of PTEs to deduct PTE taxes from their federal taxable income. While the IRS has stated that additional guidance is forthcoming, no expectations for the timing for such guidance have been provided.

Connecticut was the first state to adopt such a workaround, and to date, 22 states, including Oregon, have followed suit to offer taxpayers some SALT cap relief. The legislative workarounds are not uniform, and the provisions for these pass-through entity taxes vary greatly among states.

Oregon Adopts SALT Workaround for 2022 and 2023

Oregon adopted legislation in July 2021 via SB 727 to provide a workaround to allow Oregon taxpayers to receive a federal deduction for state and local taxes attributable to pass-through income. This SALT workaround, available for tax years starting on or after January 1, 2022, until the end of 2023, will allow certain PTEs to elect to pay tax on their Oregon-source income at the entity level. The tax expense then reduces ordinary business income passed through to members. The PTE will pass a refundable tax credit out to owners to be used against Oregon personal income tax.


  • Oregon PTE-T is available to Partnerships, S Corporations or Limited Liability Companies electing to be treated as Partnerships, or S Corporations. Sole Proprietorships, Single Member LLCs, and wage earners are left out in the cold on this one.
  • All members of the eligible PTE must be subject to personal income tax imposed under ORS Chapter 316 or PTEs that are owned entirely by individuals subject to personal income tax.
  • Eligible income includes the distributive proceeds of the entity, including net income, dividends, royalties, interest, rents, guaranteed payments, and gains of a PTE derived from or connected with sources within Oregon. The tax base is different for Oregon residents vs. Oregon nonresidents.
  • Tax is assessed at 9% for the first $250,000 of distributive proceeds and 9.9% for amounts of $250,000.
  • All members of the PTE must consent.
  • Any tax deducted from Federal income will need to be added back to Oregon taxable income.
  • PTEs planning to elect can register with the state starting June 6, 2022, and should make the first estimated 2022 tax payment by June 15, 2022. Estimated payments for future years will match the quarterly due dates for individuals.
  • Administrative guidance will be forthcoming from the Oregon Department of Revenue.


SALT workarounds have the potential to create a large federal tax benefit for a number of taxpayers, but it is not without its pitfalls. Before opting in, taxpayers should take a close look at how the potential tax benefits will pencil out for all owners. We recommend consulting with your tax advisor to model this out, as what seems to be a slam dunk when it comes to tax reduction techniques is not always as beneficial as it seems on its face.

Just a few factors you should consider before opting in include:

  • An important analysis for taxpayers with income in multiple states is determining the availability to claim other state tax credits in conjunction with the PTE Tax. There are situations where taxpayers could end up paying more overall state tax by electing into the SALT workaround.
  • Not all states allow for the SALT workaround credit to be refunded. This could cause poor results in certain situations for some taxpayers.
  • Guaranteed payments or specially allocated income among partners could significantly skew the economics of the deduction, absent changes to a partnership/operating agreement to account for these complexities.
  • There could be severe unintended consequences if the SALT workaround results in the revocation of a corporation’s S-election.
  • There is the potential need to report the state income tax refund as income in the following year if it represents an accretion to wealth. Depending upon how the taxable benefit is calculated, this could reduce the overall benefit of the SALT workaround.

The information provided here is just the tip of the iceberg. A complete evaluation is required to determine the net tax benefits. While the IRS has promised the issuance of additional guidance, the impending sunset of the SALT cap will likely make this issue a low priority for the Service. We will continue to monitor developments regarding SALT workarounds to keep you informed. As always, please feel free to reach out to your Perkins tax advisor with any questions.