A pass-through entity tax, or PTET, is an optional state-level tax that lets partnerships, S corporations, and LLCs taxed as either one pay state income tax directly as a business instead of passing that liability to each owner’s personal return. The point of the election is to work around the federal cap on state and local tax deductions, which the 2017 Tax Cuts and Jobs Act set at $10,000 and the 2025 One Big Beautiful Bill Act raised to $40,000. More than 30 states offer some version of the election, and even with the higher SALT cap in place, PTET still produces real federal savings for many owners heading into 2026.
How the Federal Savings Actually Work
The benefit comes from moving the state tax payment off the owner’s Schedule A and onto the business’s return. When you pay state income tax personally on your share of business income, that payment is an itemized deduction bounded by the SALT cap. When the entity pays the same tax through a PTET election, the payment reduces the business’s net income before anything flows to the owners. Lower entity income means a smaller K-1, which means less federal taxable income for each owner, and none of it counts against the personal SALT cap.1Internal Revenue Service. Notice 2020-75
A simplified example: a two-partner LLC earns $500,000 and elects to pay a 5% state PTET of $25,000. That payment drops the entity’s reportable income to $475,000, so each partner’s K-1 shows $237,500 rather than $250,000. Each partner’s federal taxable income falls by $12,500, and the personal SALT cap is untouched.
Owners who pay self-employment tax get a second layer of savings. Because PTET reduces the entity’s net income before it flows through, it also lowers the base used to calculate self-employment tax. Paying the same state tax personally does not.
What the 2025 SALT Cap Change Did to the Math
The One Big Beautiful Bill Act raised the individual SALT deduction cap from $10,000 to $40,000 starting with the 2025 tax year. For 2026, the cap rises 1% to $40,400, with 1% annual bumps through 2029, and then resets to $10,000 for 2030 and later years.
A phase-down sits on top of that increase. For taxpayers with adjusted gross income above $500,000 in 2025 ($505,000 in 2026, also indexed at 1%), the cap shrinks by 30 cents for every dollar of income above the threshold. At high enough income, the effective cap falls back to $10,000. Many of the business owners who benefit most from PTET, precisely because they have significant pass-through income, still face an effective cap well below $40,400.
When PTET Is Still Worth It
The higher cap reduced the urgency for some owners but did not eliminate the benefit. The election continues to make sense in a few recurring situations.
The clearest case is total state and local taxes above $40,400. For an owner drawing substantial income out of a state with a 6% or higher rate, PTET easily exceeds the cap, and paying at the entity level keeps the full amount deductible with no ceiling.
Owners whose state taxes fall under the cap can still come out ahead. When the entity pays PTET and reduces the income flowing through, remaining itemized deductions sometimes drop below the standard deduction ($15,000 for single filers, $30,000 for joint filers in 2025). Those owners can take the standard deduction on top of the entity-level deduction, effectively getting both. A new above-the-line charitable deduction beginning in 2026 ($1,000 for individuals, $2,000 for joint filers) adds a small additional layer for owners who move to the standard deduction this way.
The self-employment tax reduction stays intact regardless of what the SALT cap does, because it never depended on itemized deductions in the first place.
Which Businesses Qualify
PTET is available to entities treated as pass-throughs for federal tax purposes: S corporations, general partnerships, limited partnerships, limited liability partnerships, and LLCs taxed as either partnerships or S corporations. In practical terms, that means businesses filing Form 1065 or Form 1120-S.2Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
Sole proprietorships do not qualify. Neither do single-member LLCs the IRS treats as disregarded entities, because there is no separate entity return to carry the election. C corporations are also excluded, since they already pay tax at the entity level and their income does not pass through in the same way.
How Owners Get Credited on Their State Returns
When the business pays PTET, each owner receives a credit on their personal state return equal to their proportional share of the tax paid. A partnership with three equal partners that pays $30,000 in PTET generates a $10,000 state credit for each partner.
The owner still reports their full share of business income on their personal return, then applies the credit against the state tax otherwise owed. The state collects the same revenue in the end; only the return it appears on changes.
What happens when the credit exceeds the owner’s state liability depends on the state. Some refund the excess. Others require a carryforward for a set number of years. A few allow neither, and unused credits are lost. Worth checking before electing, especially for owners whose state tax liability is small compared to their share of business income.
Making the Election and Paying on Time
PTET is elected annually in most states, and once the deadline passes, the choice is fixed for that tax year. Many states require the election by March 15 for calendar-year entities, though some accept the election on the return itself and others require a separate filing through the state’s tax portal before the return is due.
Most states also require estimated payments during the year. Schedules vary: some track federal quarterly dates, others run on their own calendars, and a few require only two installments. Underpayment triggers penalties and interest, so the payment schedule matters as much as the election itself. Keep confirmation records for every election filing and payment; owners need documentation to claim their credits, and the entity needs it to support the federal deduction.
Tradeoffs to Weigh Before Electing
PTET is not automatically right for every eligible business. Several tradeoffs get less attention than the headline savings.
- Lower qualified business income. The PTET deduction reduces entity net income, which also reduces each owner’s QBI for the Section 199A pass-through deduction. Depending on the owner’s income and other factors, the smaller 199A deduction can partially offset the SALT benefit.
- Cash flow shifts to the business. The entity pays state tax throughout the year. Owners who previously handled their own state estimates may find the burden moves to the business, which can be a problem when income is seasonal or uneven.
- Higher compliance costs. The election adds complexity to the return and often raises preparation fees. For smaller businesses with modest savings, the added cost can eat into the benefit.
- Uneven results across owners. In a multi-owner business, some partners benefit substantially while others, perhaps in lower brackets or offsetting losses elsewhere, see little or nothing. The election applies to the whole entity, so it forces a joint decision.
There is no formula that settles the question in the abstract. The answer depends on the owners’ individual tax pictures, the state’s specific PTET rules, and how the numbers interact across returns. Running the calculation both ways is the only reliable check.
Owners in Multiple States
Multi-state ownership adds complications the single-state case avoids. When a business pays PTET in one state, the owner’s home state may or may not give credit for that payment. Some states allow a credit for PTET paid elsewhere, but the rules on how it works are inconsistent. Sometimes the credit is claimed at the entity level; sometimes the owner claims it personally.
Nonresident owners create an additional wrinkle. A partner who doesn’t live in the state where the business operates may not qualify for the PTET credit there, and their home state may not recognize the payment either. That combination can leave the same income effectively taxed twice at the state level, defeating the purpose of the credit. Ownership groups spread across multiple states should map the credit interactions in every relevant jurisdiction before electing.
State Availability Heading Into 2026
The state landscape is shifting because of how individual PTET statutes were drafted.3The Tax Adviser. Recent Developments in States’ PTETs Some states tied their PTET provisions to the existence of the federal SALT cap. Because the One Big Beautiful Bill extended the cap rather than letting it expire, those PTET regimes should remain in place. But a handful of states, including California, Illinois, Utah, and Virginia, wrote hard expiration dates into their laws at the end of 2025 regardless of federal action. Unless those legislatures extend, the election will not be available for 2026 tax years in those states.
Most states with PTET have no built-in expiration, and the election continues to be available as long as the numbers work. Because rules are changing quickly and the deadline to elect for 2026 falls early in the year, check your state revenue department’s guidance before making the call.