How the SALT Act Impacts Small Business Owners

How the Proposed SALT Act Impacts High-Income Self-Employed Individuals—and How a Defined Benefit Plan Can Help

As Congress revisits the cap on the State and Local Tax (SALT) deduction, high-income self-employed individuals are watching closely. The proposed SALT Act would modify the $10,000 cap introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, potentially restoring a larger deduction for state and local taxes. While the final outcome of the legislation remains uncertain, the conversation has reignited interest in strategies to mitigate tax liability for top earners. One of the most effective tools? A Defined Benefit (DB) plan.

The SALT Deduction Cap and Its Repercussions

Under current law, taxpayers who itemize deductions are limited to a $10,000 cap on the deduction for state and local income, property, and sales taxes. This disproportionately affects high-income individuals in high-tax states such as California, New York, and New Jersey. Self-employed professionals—such as consultants, doctors, lawyers, and small business owners—often find themselves without many of the tax shelters available to W-2 earners with corporate benefits.

If the SALT cap is raised or repealed under the proposed legislation, these individuals may see some relief. However, the extent and timing of any changes remain unclear, which leaves many looking for alternative tax strategies they can implement now.

Enter the Defined Benefit Plan

A Defined Benefit plan is a type of qualified retirement plan that allows for significantly higher tax-deductible contributions than SEP-IRAs, SIMPLE IRAs, or solo 401(k)s. Designed to provide a specific retirement benefit, DB plans allow older, high-income self-employed individuals to make annual contributions well into the six-figure range—sometimes exceeding $200,000 depending on age, income, and years to retirement.

Why This Matters Now

With the uncertainty around SALT deduction reforms, a Defined Benefit plan offers a proactive, IRS-approved way to reduce taxable income now:

• Large Tax Deductions: Contributions to a DB plan are generally 100% deductible as a business expense, which directly lowers adjusted gross income.
• Compounding Tax-Deferred Growth: Like other retirement plans, funds grow tax-deferred until distribution, which typically occurs at retirement when you’re likely in a lower tax bracket.
• Flexible Design: DB plans can be customized to suit solo practitioners or businesses with a few employees. They can even be paired with a 401(k) for enhanced savings.
• Creditor Protection: Like other qualified plans, Defined Benefit plans enjoy strong protection from creditors under ERISA (if set up properly).

Example: A Real-World Benefit

Consider a 55-year-old consultant earning $400,000 a year. In a high-tax state, they could lose a significant portion of income to federal and state taxes, especially with the SALT cap in place. By establishing a Defined Benefit plan, they may be able to contribute $150,000 or more annually—potentially saving over $50,000 in federal income taxes alone.

Final Thoughts

While the future of the SALT deduction is still up in the air, Defined Benefit plans offer a time-tested solution for high-income self-employed individuals looking to minimize taxes and build wealth for retirement. If you’re affected by the SALT cap—or simply want to take control of your financial future—consulting with a retirement plan specialist or tax advisor can help you evaluate if a DB plan is the right move.