A PTET tax payment is a state income tax that a partnership, S corporation, or eligible LLC pays at the entity level on behalf of its owners, letting the business deduct the payment federally and letting owners claim a credit on their personal state returns. More than 36 states adopted these pass-through entity tax programs as a workaround to the federal cap on individual state and local tax deductions. For 2026, two federal changes reshape the math: the individual SALT cap jumps to $40,400, and pass-throughs in certain service fields lose the entity-level federal deduction entirely.
How the Workaround Works
The 2017 Tax Cuts and Jobs Act capped the individual SALT deduction at $10,000, which hit owners of profitable pass-throughs in high-tax states hardest. In November 2020, the IRS issued Notice 2020-75 confirming that state income tax paid at the entity level by a partnership or S corporation is a deductible business expense for federal purposes, and that such payments are “not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation.”1Internal Revenue Service. Notice 2020-75
The mechanics run in two steps. The business elects into its state’s PTET program and pays state income tax on behalf of its owners, which reduces the entity’s federal taxable income and flows through to owners as a smaller income figure on their Schedule K-1. Each owner then claims a credit on their personal state return for the tax the business already paid, so the same income isn’t taxed twice at the state level.
What Changed for 2026
The One Big Beautiful Bill Act, signed July 4, 2025, made two changes that determine whether the election still pays off.2Internal Revenue Service. One, Big, Beautiful Bill Provisions
The individual SALT cap rose to $40,400 for tax year 2026 ($20,200 for married filing separately), up from $10,000. The cap phases down for taxpayers with modified adjusted gross income above $500,000 ($250,000 married filing separately), but never below $10,000. It grows 1% each year through 2029, then reverts to $10,000 for tax years beginning after 2029.3Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes
The second change is more disruptive. For tax years beginning after December 31, 2025, the entity-level federal deduction is gone for specified service trades or businesses (SSTBs) and investment entities. SSTBs include law, medicine, accounting, consulting, financial services, and performing arts. State taxes paid through a PTET election by these businesses must now be separately stated and passed through to individual owners, where they fall under the personal SALT cap along with any other state tax the owner pays. Non-SSTB operating businesses can still deduct PTET payments at the entity level.
Together, these changes flip the calculation for many owners. If your state tax liability sits below the new $40,400 cap and you don’t run an SSTB, the election may deliver little or no federal benefit. If you run an SSTB, the workaround no longer works federally at all. The clearest remaining winners are non-SSTB pass-throughs whose owners face state tax bills well above $40,400 and whose income doesn’t trigger the phase-down.
Which Businesses Can Elect
The election is built for entities that pass income directly to owners: S corporations, partnerships, and LLCs taxed as partnerships or S corporations for federal purposes.4Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation Limited liability partnerships and limited partnerships generally qualify.
Most states require owners to be individuals, estates, or certain trusts. C corporations and entities owned by other corporations are typically excluded, because their owners aren’t subject to the individual SALT cap. Single-member LLCs treated as disregarded entities can’t make their own election, since the IRS doesn’t treat them as separate for income tax. Publicly traded partnerships are excluded in most states.
Making the Election
Every state’s PTET is voluntary, but once you elect, the choice binds the entity and all its owners for the full tax year. In most states, the election becomes irrevocable after the due date of the first estimated payment; before that date, the entity can usually revoke through the state’s tax portal.
An authorized person, typically whoever signs the entity’s state return, makes the election for the business. This is where the trap sits: the election binds every owner, not just the ones who want in. An owner in a different state who stands to lose a credit at home has no individual opt-out once the entity elects. If your partnership has owners scattered across states with different rules, the analysis has to happen owner by owner before the election deadline. Model the impact for each one first.
Deadlines vary. Many states set March 15 for calendar-year entities; some allow the election through the extended filing deadline. Check your state’s revenue department for the exact window.
Paying the Tax and Claiming the Credit
PTET payments run electronically through your state’s business tax portal, generally by ACH debit or credit from the entity’s bank account. Save the confirmation number as proof of payment.
Nearly all states require quarterly estimated payments. Some follow the standard federal estimated schedule (April 15, June 15, September 15, January 15); others set their own dates. New York uses March 15, June 15, September 15, and December 15. The final payment covering any remaining liability is due with the entity’s return, and fiscal-year entities must shift every date to match their tax year.
A filing extension does not extend PTET estimated payment deadlines. Missing a quarterly payment triggers interest and penalties that vary by state, and some states reduce the owner-level credit when estimates fall short. California, for example, reduces the individual credit by a percentage of the underpayment. Slightly overpaying quarterly and letting the excess apply to the final payment or refund is the safer approach.
Each owner’s share of the tax paid is reported on their state Schedule K-1, and the owner claims the credit on their personal state return. In many states the credit is refundable, so if it exceeds the owner’s state tax liability, the state pays the difference. Other states treat it as nonrefundable, capping the benefit at tax actually owed. Claim the credit in the same tax year the owner reports the pass-through income: if the entity pays PTET for 2026, the owner claims the credit on the 2026 personal return even if the entity files in 2027.
When Owners Live in Different States
The election gets harder when an entity operates in one state and has owners in another. Normally, a resident who pays income tax to another state claims a credit at home to avoid double taxation. PTET doesn’t always fit that framework cleanly.
Some states, sometimes called reverse credit states, flip which return carries the credit: a resident owner earning income in another state claims the other state’s credit on the nonresident return filed there, not on the home-state resident return. When both states have PTET programs with different credit rules, an owner can end up unable to use one of the credits effectively. Arizona, California, and Oregon are commonly cited examples where this mismatch causes problems.
Run the numbers for each owner before the entity elects. An election that saves most owners money can cost a particular owner more than they would have paid without it, and once made, that owner is locked in for the year.
PTET and Composite Returns Are Different Tools
Some states also offer composite return filing for pass-throughs with nonresident owners. A composite return lets the entity file and pay tax for those nonresident owners so they don’t have to file individual nonresident returns. In most states you have to pick one approach or the other for each owner.
Composite returns are simpler for nonresident owners who otherwise have no reason to file in a state. PTET’s draw was the federal entity-level deduction, which composite returns don’t provide. With the 2026 changes stripping that federal benefit from SSTBs, some entities that previously elected PTET may find composite returns fit better for their nonresident owners going forward. The right call depends on each owner’s full tax picture across every state where they file.