The Senate tax bill’s changes to the PTET workaround amount to no changes at all. The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the individual state and local tax deduction cap from $10,000 to $40,000, but it left the pass-through entity tax election completely untouched.1Congress.gov. H.R.1 – 119th Congress Earlier drafts of the legislation would have restricted the PTET deduction. Those provisions were dropped from the final law. Partnerships and S corporations can continue electing PTET exactly as before, and for many high earners the workaround is now more valuable, not less.
What the Final Law Did to PTET
Nothing. The final text of Public Law 119-21 makes no changes to the deductibility of pass-through entity taxes, does not restrict which taxpayers can make PTET elections, and does not cap the entity-level deduction. IRS Notice 2020-75, which has governed federal treatment of these payments since November 2020, remains the operative guidance.2Internal Revenue Service. Notice 2020-75 – Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes The notice confirms that state and local income taxes “imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss.”3Internal Revenue Service. N-2020-75: IRS Provides Certainty Regarding the Deductibility of Payments by Partnerships and S Corporations for State and Local Income Taxes
In practical terms, an owner whose entity pays $80,000 in state income tax through a PTET election still deducts the full $80,000 at the entity level. None of it counts toward the individual SALT cap. The entity-level deduction has no dollar ceiling at all.
The New SALT Cap and Its Phaseout
To see why the PTET still matters, it helps to look at what the new individual cap actually delivers. The One Big Beautiful Bill Act raised the SALT cap to $40,000 for tax years 2025 through 2029, with married-filing-separately filers capped at $20,000. Starting in 2026, both the cap and the income thresholds below rise by 1 percent annually, putting the 2026 cap at roughly $40,400.
The higher cap comes with an income-based phaseout. The $40,000 amount is reduced by 30 percent of the amount by which modified adjusted gross income exceeds $500,000 ($250,000 for married filing separately). The deduction floor is $10,000 regardless of income. A joint filer earning $600,000 or more in 2025 sees no benefit from the increase and remains stuck at $10,000, exactly where the TCJA left them.
Why PTET Still Saves Money
A reasonable first reaction to a $40,000 cap is that the workaround matters less. It matters more for several categories of owners.
The entity-level deduction has no ceiling. A business paying $120,000 in state income tax through a PTET election deducts all $120,000 when calculating income passed through to owners. That same $120,000 paid at the individual level is capped at $40,000, or less after the phaseout. For any owner whose state tax exceeds the cap, the math is immediate.
The PTET also reduces self-employment tax for partners. When a partnership pays state income tax directly, the deduction reduces income flowing through to partners for both federal income tax and self-employment tax. A partner who pays state income tax personally gets no self-employment reduction from that payment. The self-employment tax rate is 15.3 percent on the first $176,100 of net earnings in 2025, and 2.9 percent above that.
There is a standard-deduction angle too. If the PTET election pulls enough state tax off the individual return, remaining itemized deductions may fall below the standard deduction. The owner takes the standard deduction and effectively captures both the entity-level PTET benefit and the full standard deduction. Without the election, itemizing would have produced less total benefit.
For high earners hit by the phaseout, the PTET is the only tool that bypasses the SALT limitation entirely. A joint filer with MAGI above $600,000 is back at a $10,000 cap. The PTET moves state tax off that line altogether.
How the Mechanics Work
The PTET shifts a state income tax payment from the individual owner to the business. When a partnership or S corporation elects, it pays state income tax directly at the entity level rather than passing that liability through to owners. The IRS treats the payment as an entity-level deduction against the income the business distributes, not as a state tax paid by the individual.2Internal Revenue Service. Notice 2020-75 – Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes The SALT cap applies only to taxes deducted on individual returns, so this reclassification avoids the cap.
Owners are not stuck paying twice on the state side. States offering PTET give each owner a dollar-for-dollar credit on their individual state return for the tax the entity paid on their behalf. The net state tax burden stays the same. The federal deduction shifts from a capped individual line item to an uncapped business expense.
Who Can Elect
Eligibility follows federal tax classification. Entities taxed as partnerships or S corporations can generally elect, which covers general partnerships, limited partnerships, LLPs, multi-member LLCs taxed as partnerships, and S corporations.4Department of Revenue. Pass-Through Entity Tax (PTET) The entity files Form 1065 or Form 1120-S and allocates income to individuals.
Sole proprietorships cannot elect because there is no legal separation between owner and business for tax purposes. Single-member LLCs treated as disregarded entities are also generally excluded.4Department of Revenue. Pass-Through Entity Tax (PTET) California is one of the few states that carves out a narrow exception for certain disregarded single-member LLCs owned by individuals.
Tiered partnership structures create complications. State rules vary on whether a lower-tier entity can make its own election and how the credit flows up through ownership. There is no uniform federal rule, so tiered entities need to evaluate each state’s PTET statute individually.
Election Deadlines and Estimated Payments
Election deadlines are the biggest trap. States set their own timelines, and missing the window usually means waiting a full year. New York requires the election to be filed online between January 1 and March 15 of the tax year, and it becomes irrevocable after the first estimated payment due date.5New York State. Pass-through Entity Tax (PTET) New Jersey requires an annual election form filed with the Division of Taxation.6New Jersey Division of Taxation. Pass-Through Business Alternative Income Tax (PTE/BAIT) Other states allow the election on a timely filed return, sometimes including extensions. Colorado, Idaho, and Louisiana require it on a timely filed return with no extension option.
Owner consent requirements also vary. Some states require only an authorized person to make the election on behalf of the entity. Others look to the operating agreement or bylaws for authority. Because the election affects every owner’s tax situation, documenting consent through a signed resolution is safer than relying on default rules, even where a state does not require it. An owner who objects after the election becomes irrevocable has limited recourse.
Most states require quarterly estimated payments, often on the same schedule as individual estimates: March 15, June 15, September 15, and December 15. Underpayment interest generally runs between 7 and 8 percent annually. Montana subjects PTET underpayments to the same interest and penalties as individual income tax and exempts first-year elections from underpayment interest on estimated payments.7Montana Department of Revenue. Montana Pass-Through Entity Tax: How to Elect and Pay
At the federal level, the entity’s PTET deduction reduces income flowing through to owners, which changes each owner’s individual estimated tax obligation. The standard federal safe harbors apply: paying at least 90 percent of current-year tax or 100 percent of prior-year tax (110 percent if prior-year AGI exceeded $150,000) generally avoids underpayment penalties.
The Multi-State Trap
PTET works cleanly when all owners live in the state where the entity earns its income. It gets messier when the business operates in multiple states or partners live somewhere other than where the business is taxed. The core risk: your home state may not credit you for PTET paid to another state.
States generally give residents a credit for income taxes paid to other states, preventing the same income from being taxed twice. Some states do not treat an entity-level PTET payment the same as an individual tax payment for purposes of that credit. If your home state views the PTET as a business tax rather than a substantially similar income tax, you may lose the credit and end up paying tax on the same income at both entity and individual levels.
The problem is worst when the state receiving the PTET payment uses a subtraction-from-income method rather than a direct credit. The PTET reduces your pass-through income in the source state but generates no credit you can use at home. The result is effective double taxation on the overlapping portion of income. Verify how each state treats the credit before electing, because this is one of the few areas where the PTET can raise your total tax bill.
Federal Questions Still Open
The IRS announced its intent to publish proposed regulations in Notice 2020-75 and has not done so.2Internal Revenue Service. Notice 2020-75 – Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes Practitioners have been operating under the notice alone for more than five years.
Treatment of PTET refunds is one open question. If a state refunds part of a PTET payment in a later year, it is unclear whether the entity or its owners must include that refund in federal gross income. For individuals, the tax benefit rule generally requires inclusion of a state tax refund if the original payment produced a federal tax benefit. Whether the same logic extends to entity-level payments is unresolved.
The absence of final regulations also leaves ambiguity around PTET payments by entities with tax-exempt partners, the interaction between PTET deductions and guaranteed payments, and whether estimated PTET payments made in one year but attributable to another receive entity-level deduction treatment. None of these gaps have slowed adoption of the election, but they create risk that entities and their advisors have to manage without definitive rules.