Beat the Unfair $10,000 SALT Cap with a C Corporation

C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome, especially since you can bypass the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA), with a C corporation.

Yes, really.

As you read the article, you’ll discover how you can regain at least some (maybe all) of your SALT deduction—and when to take a second look at the C corporation as a possible entity for your business.

TCJA and Your SALT Deduction

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:1

  • Income taxes
  • Real property taxes
  • Personal property taxes
  • Foreign income and real property taxes

Tax reform took two direct actions against your itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,2

  • you can’t deduct foreign real property taxes, and
  • your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).

If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.

For many of you, this means those taxes are now non-deductible, because you have real property and other taxes that already exceed the $10,000 cap.

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Schedule A. The limit does not apply to C corporations.3

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

Let’s walk through the numbers to show you how this works in two examples.

Example 1

You are a California dentist operating as an S corporation with wages to you of $70,000 and S corporation pass-through net income of $100,000.

You are in the 24 percent federal income tax bracket and the 9.3 percent California income tax bracket. The total tax on your pass-through income is $28,500:

  • $9,300 ($100,000 times 9.3 percent) for California, and
  • $19,200 ($100,000 less $20,000 Section 199A deduction, times 24 percent) for federal.


  • None of the $11,300 is deductible to you on Schedule A (assuming your state taxes already exceed $10,000).
  • You don’t get a Section 199A deduction because you are a specified service trade or business (SSTB) and your taxable income is over the phase-in range.

If your business were a C corporation, then the total tax bill on the net income would be $27,984:

  • $8,840 ($100,000 times 8.84 percent) for California, and
  • $19,144 ($100,000 less $8,840 times 21 percent) for federal.

In this circumstance, the C corporation saves you a whopping $20,316 on the pass-through income.

Don’t forget—you’ll pay a 20 percent tax on any dividends you take from the C corporation, in addition to the tax above.

C Corporation Considerations

In both examples 1 and 2 above, the C corporation paid less tax overall, before considering taxes paid on any dividends taken.

However, for many small-business owners like you, the S corporation is often the best choice of business entity because of the taxes you’d pay on the dividends from a C corporation.

How on earth do you figure out which is best? You’ll need to run the numbers for your specific business or find a qualified tax advisor to help you figure it out.

But if you need a quick assessment of your situation, consider a C corporation if some of the following apply to you:

  • The federal and/or state tax rates you pay in the C corporation are lower than your individual tax rate.
  • The state taxes on the S corporation pass-through are non-deductible to you due to the $10,000 SALT cap.
  • Your Section 199A deduction is substantially reduced or eliminated by the SSTB or wage and qualified property limitations. Read Tax Reform: Will Section 199A Phase In or Phase Out Your 20 Percent Deduction? for more information.
  • You have consistent losses, and the activity is at risk of being subject to the hobby loss rules. Read Do Your Business Losses Make You an IRS Target? If So, Do This for more information.
  • You plan to retain earnings in the C corporation for business purposes—and not pay out a lot of dividends to yourself.
  • You have significant medical expenses and can give yourself a Section 105 plan as a tax-free fringe benefit. Read Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement) for more information.
  • You could qualify for the tax-free sale of your C corporation stock, under Code Section 1202. Read Wow! Pay Zero Capital Gains Taxes on Sale of Small C Corporation for more information.


The TCJA limits your Schedule A state and local tax deductions to $10,000, which limits the tax benefits you receive for the state income taxes that you pay on your S corporation pass-through income.

The TCJA did not limit the SALT deduction that your C corporation can take. This means that in the right circumstances, you can create more benefits by operating your business as a C corporation.

To figure out the best tax structure for your particular business, you’ll need to run the numbers for your specific business or find a qualified tax advisor to help you figure it out.

1 IRC Section 164(a) 2018.
2 IRC Section 164(b)(6) 2018.
3 Ibid.