How a Rhode Island Child Care Owner Saved $12,500 in Federal Taxes With One Simple Election

Meet the Client

Jennifer is the owner of a licensed child care center in Rhode Island. Her business had a strong year — over $600,000 in taxable pass-through income flowing directly onto her personal return. She was a high earner by every measure, and her tax bill reflected it. What she didn’t know was that a little-known state tax election could legally reduce her federal tax liability by thousands of dollars — without changing a single thing about how she ran her business.

The Challenge

As a high-income business owner, Jennifer faced a frustrating limitation that many successful entrepreneurs run into: the federal $10,000 cap on State and Local Tax (SALT) deductions. Rhode Island’s income tax on her $600,000 in business income was substantial — but because of the SALT cap, she could only deduct $10,000 of that on her federal return. The rest was simply lost as a deduction, inflating her federal taxable income and her tax bill.

At her federal marginal tax rate of 35%, every dollar of state tax she couldn’t deduct cost her an extra 35 cents to Uncle Sam. On $600,000 of business income, that added up fast.

“I knew I was paying a lot in taxes, but I assumed that was just the price of having a good year. Nobody had ever told me there was a way to get around the SALT cap. I didn’t even know what a PTE election was.”

Our Approach

When Jennifer came to Honest Buck, we identified her immediately as an ideal candidate for Rhode Island’s Pass-Through Entity (PTE) Tax Election. This strategy — available in Rhode Island and most other states — allows a business to pay state income tax at the entity level rather than passing it through to the owner’s personal return. Because the IRS treats entity-level state taxes as a standard business deduction, they are fully deductible on the federal return — completely bypassing the $10,000 SALT cap.

We elected into Rhode Island’s PTE regime for Jennifer’s business. The entity paid Rhode Island’s 5.99% tax rate on her $600,000 in business income — a total of $35,940 in state tax. That same $35,940 became a fully deductible business expense on her federal return, reducing her federal taxable income dollar-for-dollar.

Rhode Island also provides a 90% personal income tax credit to owners whose entities make the PTE election, meaning Jennifer’s personal RI tax liability was almost entirely offset. The net result: she kept the full federal deduction while paying only a small incremental cost at the state level.

Here’s how the numbers compared:

	Without PTE Election	With PTE Election
Business Income	$600,000	$600,000
RI State Tax Deductible on Federal Return	$10,000 (SALT cap)	$35,940 (full deduction)
Additional Federal Deduction Unlocked	—	$25,940
Federal Tax Savings (at 35% rate)	—	$12,579
RI Personal Tax Credit (90% of PTE paid)	—	$32,346
Net Tax Savings	$0	~$9,000

The Results

By making one proactive election before the tax year closed, Jennifer unlocked $25,940 in additional federal deductions she would have otherwise lost entirely to the SALT cap. At her 35% federal marginal rate, that translated to $12,579 in federal tax savings. After accounting for Rhode Island’s 90% PTE credit — which offset nearly all of the entity-level state tax — her net benefit was approximately $9,000.

No restructuring. No complex transactions. Just a strategic election that most high-earning business owners never know to make — because nobody told them it existed.

“Honest Buck brought this to me — I didn’t come to them asking for it. That’s the kind of proactive thinking I’d been missing from my old accountant for years. They just found money I didn’t know I was leaving on the table.”

Jennifer now has the PTE election built into her annual tax planning calendar. Each year, Honest Buck evaluates her income projections and confirms the election remains the right strategy — so she never accidentally leaves this deduction behind again.