A PTE payment is a state income tax paid directly by a pass-through business — an S-corporation, partnership, or LLC taxed as one — on the income that would otherwise flow to its owners’ personal returns. It exists as a workaround to the federal cap on state and local tax (SALT) deductions: because the business pays the tax as a business expense, the full amount stays deductible federally instead of getting squeezed by the individual SALT cap. More than 36 states offer some version of this election, but the value of making one shifted in 2025 when Congress raised the individual SALT cap from $10,000 to $40,000.
Why the Workaround Exists
Pass-through businesses don’t pay federal income tax themselves. Profits flow through to the owners, who report the income on their personal returns. Before 2018, owners could deduct the full amount of state and local taxes they paid when calculating federal tax. The Tax Cuts and Jobs Act of 2017 changed that, capping the individual SALT deduction at $10,000 ($5,000 for married filing separately).1AHACPA. PTE Taxes and HUD
The cap hit business owners in high-tax states hard. Someone with $80,000 in state income tax could previously deduct the whole amount; after the TCJA, only $10,000 counted. States responded by creating PTE elections that shift the point of tax collection from the individual to the business. Because the business pays the tax as an expense rather than the owner claiming it as a personal itemized deduction, the SALT cap doesn’t apply.
The IRS confirmed this approach in late 2020. Notice 2020-75 stated that state taxes paid by a partnership or S-corporation on its income are deductible in computing the entity’s non-separately stated taxable income for the year the payment is made.2Internal Revenue Service. Notice 2020-75 That deduction reduces the income flowing to owners before it ever reaches their personal returns, effectively restoring the full federal deduction for state tax.
Does a PTE Payment Still Save You Money in 2026?
The One Big Beautiful Bill Act, signed on July 4, 2025, raised the SALT deduction cap to $40,000 for individuals and joint filers ($20,000 for married filing separately), effective for tax year 2025. For 2026, the cap increases 1 percent to $40,400 and continues rising 1 percent annually through 2029.3Bipartisan Policy Center. SALT Deduction Changes in the One Big Beautiful Bill Act
The higher cap reduces the benefit of a PTE election for many owners. If your total state and local taxes already fit under $40,400, there’s no cap to work around and little reason to add an entity-level election.
The election is still valuable for two groups. First, owners whose state tax bills exceed the new cap. Second, higher-income owners subject to the phase-down: the $40,400 cap phases back down to $10,000 for taxpayers with adjusted gross income above roughly $505,000, at a rate of 30 cents per dollar over that threshold.3Bipartisan Policy Center. SALT Deduction Changes in the One Big Beautiful Bill Act For those owners, the effective SALT cap shrinks back to $10,000, and the PTE workaround remains as valuable as it was before.
The QBI Trade-Off
This is where most owners need to slow down. The PTE deduction reduces the entity’s income before it reaches the owners, so it also reduces the qualified business income used to calculate the Section 199A deduction. That deduction, made permanent in 2025 at a 20 percent rate, lets eligible pass-through owners exclude up to a fifth of their business income from federal tax. Every dollar of PTE tax paid shrinks QBI by a dollar, which shrinks the 199A deduction by 20 cents.
A simplified example: if your entity pays $50,000 in PTE tax, your QBI drops by $50,000, and your Section 199A deduction shrinks by $10,000. That lost deduction costs roughly $2,200 to $3,700 in extra federal tax depending on your bracket. The PTE election still produces a net benefit when the SALT cap savings exceed that cost, but the margin is thinner than many owners assume now that the cap is $40,400. Running both scenarios with your actual numbers is the only way to know whether the election saves you money.
Who Can Make the Election
PTE elections are available to S-corporations, partnerships, and LLCs taxed as either. The common thread is income that passes through to owners rather than being taxed at the entity level. C-corporations don’t qualify because they already pay their own corporate income tax. Sole proprietorships are excluded in virtually every state because there’s no separate legal entity to make the payment.
Ownership composition matters. Many states restrict the election based on who the owners are. A partnership with a C-corporation as a partner often cannot include that partner’s share of income in the PTE tax base. Some states exclude income allocable to other partnerships in tiered structures; others require all owners to be individuals for the credit to pass through properly.4MultiState Tax Commission. State Rules on Tiered Partnerships – December 2024 Check whether your state disqualifies the entity because of corporate partners, trusts, or other entities in the ownership chain before making the election.
Most states require consent from a majority of owners. The election is typically annual and becomes irrevocable after a set date, often the due date of the first estimated payment or March 15 for calendar-year filers. A few states allow a standing election that remains in effect until revoked.
How the Payment and the Credit Actually Move
When a partnership makes a PTE payment, that tax shows up as a deduction on Form 1065, page 1, Line 14 (Taxes and Licenses), reducing the entity’s ordinary business income before anything flows to the owners.5Internal Revenue Service. Instructions for Form 1065 (2025) S-corporations follow the same logic on Form 1120-S. The IRS specifically requires that PTE tax not be broken out as a separate item on each owner’s Schedule K-1. It’s embedded in the non-separately stated income, so owners see lower pass-through income rather than a separate deduction line.2Internal Revenue Service. Notice 2020-75
On the state side, owners get a credit or other offset against their personal state income tax for their share of what the entity paid. This prevents the same income from being taxed twice at the state level, once when the entity pays and again when the owner files personally.6MultiState Tax Commission. State Pass-Through Entity (PTE) Taxes Mechanics vary. Some states provide a dollar-for-dollar credit. Others exclude the PTE-taxed income from the owner’s state return entirely. In most states the credit is nonrefundable, meaning it can reduce state tax to zero but won’t generate a refund on its own. A few states allow refundable credits.
Multistate and Nonresident Owner Risk
When a business operates in more than one state, PTE elections get complicated fast. The core risk is double taxation: the entity pays PTE tax to the state where it earns income, but the owner’s home state may not give full credit for that payment. Whether the home state grants a credit depends on whether it considers the other state’s PTE tax substantially similar to its own income tax.
New York, for example, only allows a credit for PTE taxes paid to states that also impose a personal income tax substantially similar to New York’s. Owners in New York-based entities that pay PTE tax to states without an income tax, such as Texas, Tennessee, or New Hampshire, cannot claim a credit for those payments. Other states that use an income-exclusion model, like Alabama and Georgia, may not have amended their credit laws to account for PTE taxes paid elsewhere.
For entities with owners scattered across states, an election that saves one owner money may cost another. Model the impact on each owner individually before the entity commits to something it cannot revoke.
Making the Election and Paying on Time
The election is made through the state’s tax portal, usually by filing a specific election form or checking a box on the entity’s state return. Most states require the election before the first estimated payment is due, often March 15 for calendar-year filers. Once the deadline passes, the election is generally irrevocable for that tax year.
Estimated PTE tax payments usually follow the same quarterly schedule as federal estimated taxes: April 15, June 15, September 15, and January 15 of the following year.7Internal Revenue Service. Individuals 2 Some states set their own deadlines, so verify dates with your state’s Department of Revenue. Underpaying or missing a quarterly installment can trigger interest and penalties. Most states require electronic payment through their tax portal, with a final reconciliation on the annual state return, typically due March 15 for partnerships and S-corporations.