The pass-through entity tax, often shortened to PTET or PTE tax, is an elective state-level tax that lets partnerships, S corporations, and LLCs taxed as either pay state income tax directly as a business instead of leaving each owner to pay it individually. More than 35 states now offer some version of the election. It exists as a workaround to the federal cap on state and local tax deductions, and while that cap rose substantially for 2026, the election still produces real savings for many business owners whose state tax bills exceed what they can personally deduct.
Why the Election Exists
Before 2018, owners of pass-through businesses could deduct whatever they paid in state income taxes on their federal return with no ceiling. The Tax Cuts and Jobs Act changed that by adding Section 164(b)(6) to the Internal Revenue Code, capping the state and local tax deduction at $10,000 per return for tax years 2018 through 2025.1Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes For high earners in states with steep income tax rates, that cap meant tens of thousands of dollars in state taxes suddenly produced no federal benefit.
State legislatures spotted a gap: the $10,000 cap applied only to individuals, not to businesses. If the entity paid the state tax, the payment was an ordinary business expense deductible against the entity’s income before anything reached the owners’ personal returns. In 2020, the IRS effectively blessed the approach in Notice 2020-75, confirming it would allow entity-level state tax payments as deductible business expenses.2Internal Revenue Service. Notice 2020-75 That green light triggered a wave of state PTET legislation, and within a few years the election was available in the vast majority of income-tax states.
What Changed for 2026
The original $10,000 SALT cap was set to expire entirely after 2025, which would have removed the main reason PTET exists. Instead, the One Big Beautiful Bill Act extended the cap but raised the ceiling. For tax year 2026, the SALT deduction limit is $40,400 for most filers and $20,200 for married filing separately.1Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes The amount grows by 1% annually in 2027, 2028, and 2029, then drops back to $10,000 starting in 2030.
Higher earners face a catch. The $40,400 cap phases down once modified adjusted gross income exceeds $505,000, with a reduction of 30 cents for every dollar above that threshold. The cap cannot fall below $10,000 ($5,000 for married filing separately).1Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes A business owner earning $600,000 would see the cap reduced by roughly $28,500, pushing it back near the old $10,000 floor. Many of the people who benefited most from PTET before 2026 land squarely in that phase-down range.
Does the Election Still Save Money?
The higher cap changes the math without killing the strategy. PTET remains valuable for owners whose state income taxes exceed the amount they can personally deduct. That includes most high-earning owners in states with income tax rates above about 5%, because a pass-through generating several hundred thousand dollars in profit easily produces a state tax bill above $40,400. Once the phase-down kicks in above $505,000 in income, the personal SALT cap shrinks quickly, and the entity-level deduction becomes just as useful as it was under the old $10,000 limit.
The election also helps owners who take the standard deduction. Because the SALT write-off is an itemized deduction, it’s worthless to a non-itemizer. A PTET payment, by contrast, reduces the entity’s income before anything reaches the owner’s return, so it delivers a benefit no matter how the owner files. In businesses with several owners in different tax situations, the election can be a net positive even when some owners would have been fine without it.
Owners whose total state and local taxes fall comfortably under $40,400 and whose income stays below the $505,000 threshold gain nothing from making the election. The administrative cost isn’t worth it when the personal SALT deduction already covers the full amount. This is where the calculus has genuinely shifted since 2025.
Which Businesses Can Elect
The election is available to entities the tax code treats as pass-throughs: S corporations, general and limited partnerships, and LLCs taxed as either a partnership or an S corporation. The common thread is that income flows through the entity to the owners’ individual returns rather than being taxed at the corporate level first.
Sole proprietorships and single-member LLCs cannot elect. The IRS treats them as extensions of the individual owner rather than separate entities, and the whole mechanism depends on a distinct entity paying a tax the individual would otherwise owe. Most states also exclude entities with corporate partners or tiered ownership structures where one business is owned by another rather than by individual taxpayers, estates, or qualifying trusts.
Each state sets its own eligibility criteria. Some require every owner to be an eligible taxpayer, while others allow a partial election covering only the qualifying owners. Before electing, the entity needs to confirm that every participating owner meets the state’s definition.
How the Tax and Credit Work Together
The taxable base is generally the entity’s qualified net income allocated to participating owners, including ordinary business income, rental income, guaranteed payments to partners, and net capital gains flowing through the entity. Most states apply their standard individual income tax rates to that base, since the point is to mirror what the owners would have owed personally. Some states use a flat rate; others apply graduated brackets.
After the entity pays, each owner claims a credit on their personal state return equal to their allocated share of the tax. It’s a dollar-for-dollar offset: if the entity paid $15,000 on an owner’s behalf, that owner’s state bill drops by $15,000. The owner still reports the full share of entity income on the personal return, then applies the credit to avoid paying state tax twice on the same income.
The federal side works differently. Because the entity deducted the PTET payment as a business expense, the income reported on each owner’s K-1 is already reduced by that amount. Lower K-1 income means lower federal taxable income, which is where the actual SALT cap workaround takes effect. The state credit prevents double taxation at the state level; the reduced K-1 income delivers the federal deduction the owner couldn’t take personally.
In most states, if the credit exceeds the owner’s state liability for the year, the excess carries forward for a set number of years. A few states allow refunds of unused credits. One wrinkle worth watching: net operating losses generally stay with the entity when the election is in effect rather than passing through to owners, which can trap losses at the entity level if the election isn’t made in a later year.
Election, Filing, and Payment Deadlines
The election is made annually, and the deadline usually falls well before the entity’s tax return is due. In many states, the entity must elect by March 15 of the tax year the election is meant to cover. Missing that window means waiting until the following year. Some states require the election through their online tax portal, and a few allow it with the return itself, but counting on the later deadline without checking state rules is a good way to lose a year of savings.
Once elected, the entity files its PTET return alongside or as part of its regular state business return. Filing requires the entity’s federal employer identification number, each participating owner’s taxpayer identification number, and their precise ownership percentages during the year. The entity must calculate and report each owner’s share of the tax paid so the state can match those amounts to the credits owners claim personally. California, for example, uses Form FTB 3804 for calculating the elective tax and Form FTB 3893 for payment.3Franchise Tax Board. 2025 Instructions for Form FTB 3804 Pass-Through Entity Elective Tax Calculation New York uses Form IT-653 for owners claiming the credit.
Most states require quarterly estimated payments rather than a single lump sum at filing. The standard federal estimated tax dates of April 15, June 15, September 15, and January 15 serve as a rough guide, but several states set their own schedules or require different percentages with each installment. Some require a large initial payment at the time of election and smaller installments afterward. Late or underpaid installments trigger penalties and interest, and an entity that misses payments can jeopardize the credit its owners planned to claim, creating problems across multiple personal returns.
Multi-State Owners and Cross-Border Traps
Entities with owners in different states face the messiest part of the calculation. When an owner lives in a different state than where the entity pays PTET, the credit may not transfer cleanly. The owner’s home state might not recognize the credit at all, might require the owner to add back the PTET payment and claim a separate resident credit for taxes paid to other states, or might honor the credit only if the owner files an individual nonresident return in the entity’s state.
An entity paying PTET in one state on behalf of a nonresident owner may generate a credit that the owner’s home state partially or fully disallows, leaving the owner effectively overpaid. Before making the election, entities with geographically scattered owners should model the credit impact for each owner’s home state. The savings for resident owners can evaporate if nonresident owners end up worse off, and some structures require unanimous or majority owner consent to elect at all.
States Where the Election Has Expired or Is Expiring
Not every state’s program is permanent. Several built sunset provisions into their original legislation. Minnesota, Oregon, and Utah saw their PTET provisions expire at the end of 2025, so the election is no longer available for tax years beginning in 2026 unless those legislatures act to extend them. Virginia’s program expires at the end of 2026. California and Illinois had sunset dates tied to the original SALT cap expiration, so businesses in those states should verify whether the legislature has extended the program before planning around the election. Because PTET exists as a response to a federal policy that keeps shifting, state legislatures may revisit these provisions as the SALT cap changes through 2029.