The pass-through entity tax in 2026 sits in a different landscape than it did a year ago. The One Big Beautiful Bill, signed into law in mid-2025, raised the individual federal SALT deduction cap from $10,000 to $40,400 for the 2026 tax year. The PTET workaround is still available, and for many owners it still saves real money, but the higher personal cap means the election is no longer automatic. Whether it pays off now depends on your income, your state’s tax rate, and how much property tax you already carry.
What Changed for 2026
For tax years beginning in 2026, the SALT deduction cap is $40,400 for most filers and $20,200 for married taxpayers filing separately. The cap rises 1% annually through 2029, then reverts to $10,000 for tax years beginning after 2029 unless Congress acts.1Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes
The higher cap phases down at higher incomes. If your modified adjusted gross income exceeds $505,000 in 2026 ($252,500 for married filing separately), the $40,400 cap shrinks by 30 cents for every dollar above that threshold. The reduction stops at a $10,000 floor, which most filers hit at roughly $606,000 in MAGI. The threshold itself also rises 1% each year through 2029.1Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes
The new law did not restrict or eliminate the PTET workaround itself, despite earlier legislative proposals that would have limited it.
Who Still Benefits From a PTET Election
A $40,400 cap is far more generous than $10,000, but it does not neutralize the value of a PTET election for three groups.
High earners come first. If your household income runs past roughly $600,000, the phasedown pushes your effective SALT cap back down to $10,000. Nothing has changed for you in practical terms. Consider an S-corporation owner in a state with a 9% income tax rate who earns $1 million through the entity: state tax runs roughly $90,000. Without the election, only $10,000 is deductible on the federal return. With it, the full $90,000 reduces the entity’s federal taxable income before anything reaches the K-1.
The second group is owners whose combined state income and property taxes still exceed $40,400. If you pay $25,000 in property tax and $30,000 in state income tax through the entity, the individual cap covers only $40,400 of the $55,000. Running the income tax portion through a PTET election removes it from the personal SALT calculation entirely, leaving room under the cap for property taxes.
The third group is anyone planning past 2029. The higher cap is temporary. When it expires, the $10,000 limit returns, and businesses without an established PTET process will scramble to set one up on a shorter runway.
How the Federal Deduction Works
The legal foundation for the PTET structure is IRS Notice 2020-75, issued in November 2020. It stated that Treasury and the IRS intend to issue proposed regulations clarifying that state and local income taxes paid by a partnership or S-corporation on its own income are deductible by the entity in computing its non-separately stated taxable income or loss.2Internal Revenue Service. Notice 2020-75
The mechanics matter. The IRS treats PTET payments as a business expense of the entity, not a personal tax payment by the owners. Because the deduction happens at the entity level, it reduces the income flowing through to individual owners on Schedule K-1. Owners report less federal taxable income, and the personal SALT cap never enters the picture, because the deduction is not an itemized deduction on the individual return.3Department of the Treasury. Treasury and IRS to Issue Proposed Regulations Clarifying that State and Local Income Taxes Imposed on and Paid by a Pass-Through Entity Are Allowed as a Deduction
The PTET deduction is reported on the entity’s federal return, typically within taxes and licenses, reducing ordinary business income on Form 1065 for partnerships or Form 1120-S for S-corporations. This reduction flows proportionally to each owner based on ownership percentage.
One caveat: the IRS has not yet issued final regulations. Practitioners have relied on Notice 2020-75 since 2020, and the IRS has not signaled any reversal, but the technical details remain subject to change. That is one more reason to work with an advisor tracking federal developments.
State PTET Programs in 2026
More than 36 states and a handful of local jurisdictions now offer some form of elective pass-through entity tax. Rates vary. Most states set the PTET rate to match individual income tax brackets, so the entity-level tax mirrors what the owner would have paid personally, keeping the arrangement revenue-neutral for the state while the federal deduction benefits the owner. A few states use a flat rate.
Two structural risks deserve attention this year. Several states tied their PTET availability directly to the existence of the federal SALT cap. Because the cap was modified rather than eliminated, those programs remain active. If the cap expires after 2029 as scheduled, states that linked their PTET to the federal limitation will lose their programs automatically unless their legislatures act. A separate group of states enacted PTETs with explicit expiration dates, often set at the end of 2025. Some have already extended those deadlines; others require new legislation. Confirm your state’s program is still in effect before electing.
Recent legislative changes have also broadened eligibility. Early PTET programs often limited participation to partnerships and S-corporations with exclusively individual owners. Many states now allow entities with trust or estate partners to participate, and some permit single-member LLCs treated as disregarded entities to receive the credit. Partnerships with corporate partners can often elect, though the tax itself is calculated only on shares attributable to individual or trust partners.
Making the Election
Election procedures vary by state, but the process is almost always handled through the state’s online tax portal. The business logs in, links its federal Employer Identification Number, and navigates to the pass-through entity section.
Deadlines Vary More Than You Think
This is where most mistakes happen. Some states require the election separately from the tax return, sometimes as early as March 15 of the tax year. Others allow the election on a timely filed return, including extensions. A few offer a narrow window that opens and closes before the return itself is prepared. Missing the deadline almost always means waiting until the next tax year, with no waiver or late-filing option.
Treating March 15 as a universal safe harbor will cost you in states that allow election at filing (unnecessary rush) and won’t help in states with earlier windows. Check your state’s specific deadline each year, because several states changed theirs in recent legislative sessions.
Owner Information and Consent
The election requires detailed data for every owner: Social Security numbers or ITINs, ownership percentages based on the operating agreement or bylaws, and each owner’s residency status in the electing state. Residency determines both the tax calculation and which state forms apply.
Many states require documented owner consent before the entity can make the election. Some states need unanimous agreement, others allow a majority or managing-member authorization. A written record protects the entity if partners later dispute the payment. Gather consent and ownership data well ahead of the deadline.
Paying the Tax
Most states require quarterly estimated PTET payments on a schedule similar to federal estimated taxes, typically due on the 15th of the 4th, 6th, 9th, and 12th months of the tax year. Safe harbor rules for avoiding underpayment penalties vary. Some states require payments based on 90% of the current year’s liability, others accept 100% of the prior year’s liability, and a few use their own formulas.
Payments are generally made through ACH debit or electronic funds transfer within the state’s online portal. Some states still accept mailed vouchers, though electronic payment is increasingly mandatory for larger liabilities. Wire transfers can take a business day or two to clear, so a payment initiated on the deadline can post late and trigger penalties.
Underpayment penalties for estimated PTET payments follow each state’s standard framework, typically interest-based on the shortfall for the days it remains unpaid. Late filing penalties for the PTET return itself are separate and often more severe. Keep confirmation numbers and digital receipts for every payment. These records are essential for reconciling the entity’s federal return and for owners claiming their state credit.
Claiming the Credit on Your Individual Return
The PTET is designed as a closed loop. The entity pays the tax and deducts it federally, and each owner receives a state tax credit equal to their share of the PTET paid. This credit appears on the K-1 from the entity and is reported in the payments or credits section of the owner’s individual state return. Without the credit, the owner would be taxed twice on the same income at the state level.
In most states, the credit applies against the owner’s personal state income tax liability. If the credit exceeds tax due, treatment depends on the state: some refund the excess, some carry it forward, some cap the credit at the owner’s actual state liability. This last rule matters when the entity overpays PTET, because an overpayment does not automatically produce refunds for every owner.
One mechanical trap for preparers: the PTET reduces the entity’s federal taxable income, so the K-1 income flowing to the owner is already lower than it would be without the election. The state credit the owner receives is not included in federal income. Both pieces have to be recorded correctly. If the entity’s preparer misses the PTET deduction on the federal return, or the individual’s preparer fails to claim the state credit, the owner overpays federal tax, state tax, or both.
Planning Past 2029
The raised SALT cap makes the PTET election less of an automatic decision than it was from 2018 through 2025. For owners with moderate incomes and state tax bills under $40,400, the election may add complexity without meaningful savings. For high earners subject to the phasedown, and for owners whose property taxes already crowd the cap, the election remains one of the most effective tax planning tools available.
The temporary nature of the higher cap adds a wrinkle. Building your entity’s PTET process now, even at a smaller current benefit, positions you to use it fully when the cap drops back to $10,000 in 2030. Unwinding an election is easier than establishing one under a tighter deadline. Because PTET rules vary so much by state, and because the federal framework still rests on IRS guidance rather than final regulations, any election decision should involve a tax professional who knows both your state’s program and the federal reporting mechanics.