Quick Summary:
- What it is: PTET (Pass-Through Entity Tax) lets S-Corps, partnerships, and multi-member LLCs turn state taxes that get capped at the individual level into a fully deductible business expense at the entity level.
- Who it’s for: Owners of pass-through entities operating in high-tax states like California, New York, and New Jersey.
- How widespread it is: As of 2026, 36 states offer this election.
- Real-world impact: For a California LLC with $1M in revenue, two partners together saved about $34,400 using PTET.
- Watch out: PTET isn’t for everyone, and every state has a firm filing deadline — miss it, and you can’t go back and claim it retroactively. This guide walks through the details.
Is the SALT Cap Quietly Shrinking Your Profits?
The 2017 Tax Cuts and Jobs Act capped the federal deduction for State and Local Taxes (SALT) at $10,000. The 2025 One Big Beautiful Bill Act (OBBBA) temporarily raised that cap — for 2026, the SALT deduction cap is $40,400 — but the increase has a shelf life: under current law it reverts to $10,000 starting in 2030 unless Congress extends it. On top of that, once a taxpayer’s modified adjusted gross income (MAGI) exceeds $505,000, the allowable deduction phases down by 30 cents for every dollar over that threshold, with a floor of $10,000.
In other words, even with the higher cap, any state tax you personally pay above $40,400 — or any reduction triggered by the phase-out — still gets zero benefit at the federal level. That’s exactly the gap PTET is designed to close. Say you paid $80,000 in state income tax in a given year: even maxing out the 2026 cap, roughly $40,000 of that tax delivers no federal tax benefit at all.
What Exactly Is PTET?
The core idea behind PTET is simple: take state tax that would otherwise be capped at the individual level, and turn it into a fully deductible business expense at the entity level instead. The traditional approach passes company profit through to the owner, who pays state income tax personally and then tries to deduct it on Schedule A of Form 1040 — where it immediately runs into the SALT cap. PTET works differently (where the owner’s state offers the election):
- The entity itself elects to pay the state income tax, rather than passing that obligation to individual owners.
- That tax payment is treated as an ordinary business expense on the entity’s federal return and is fully deductible — with no individual SALT cap in the way.
- The state, in turn, issues each owner a tax credit, which the owner uses to offset their own state tax liability when filing personally.
The net result: the business gains a new deductible expense at the federal level, the owner’s state tax bill is offset dollar-for-dollar by the credit, and no additional state tax is actually owed — while a meaningful chunk of federal tax gets saved.
The regulatory basis: On November 9, 2020, the IRS issued Notice 2020-75, confirming that state taxes paid at the entity level can be deducted in full as an ordinary business expense, without being subject to the individual SALT cap. That notice is what set off a wave of state legislation — by 2026, an estimated 36 states have enacted their own PTET regimes. During the 2025 OBBBA legislative process, an earlier House version would have restricted PTET for certain service businesses (law firms, medical practices, investment advisors, and other SSTBs), but that restriction did not make it into the final bill — effectively preserving the PTET workaround itself for the long term. That’s a separate question from the SALT cap increase being temporary, and it’s a distinction a lot of business owners miss.
Who Qualifies for PTET — and Who Doesn’t?
Eligible entity types:
- S Corporations
- Partnerships, including general partnerships, limited partnerships, and limited liability partnerships
- LLCs taxed as a partnership or as an S-Corp
Not eligible:
- Single-member LLCs (unless they’ve elected S-Corp tax treatment)
- Sole proprietorships
- C Corporations
- Publicly traded partnerships
Two more things worth checking before you commit: if the entity has tax-exempt owners, C-corp partners, or certain trusts among its owners, that can affect eligibility for the whole entity (some states allow individual owners to opt out, but most require an all-or-nothing election); and whether a nonresident owner’s home state actually recognizes the PTET credit is a question worth confirming up front, since not every state honors credits earned elsewhere.
How Much Can It Actually Save? A California Example
Assume a California LLC with $1 million in annual taxable business income, split 50/50 between two partners, both in the 37% federal bracket.
| Without PTET | With PTET | |
|---|---|---|
| Each partner’s individual CA state tax | ~$46,500 | — |
| Federal SALT deduction cap (2026) | $40,400 | Not applicable (fully deductible at entity level) |
| Amount that gets no federal benefit | ~$6,100 per partner | $0 |
| Entity-level PTET tax (9.3% × $1M) | — | $93,000 |
| Resulting federal tax savings | — | ~$17,200 per partner |
| Combined savings for both partners | — | ~$34,400 |
Is PTET a Cure-All?
Not quite. It works best in a specific scenario: a profitable pass-through entity, operating in a high-tax state, with owners in similar situations. If the business is operating at a loss, if owners are spread across states that don’t recognize the credit, or if ownership is a mixed bag (say, a mix of individuals and C-corp partners), PTET may not pencil out — and could even add unnecessary compliance cost. Before electing, it’s worth evaluating four things: projected taxable income for the year, the PTET rate and deadline in your state, each owner’s home-state credit policy, and whether the compliance cost is actually lower than the expected benefit.
What Should You Do Next?
If your business meets the basic eligibility criteria and operates in a state that has adopted PTET, you should run the numbers before your first estimated payment deadline — these vary by state, for example March 15 for New York and June 15 for California (starting in 2026, California allows a late election even after that date, though the credit is reduced by 12.5% of the unpaid proportionate share). The PTET election is made annually and has a hard deadline — miss it, and there’s no going back to claim it retroactively for that year. Don’t wait until filing season to think about this. If you’d like help figuring out whether PTET makes sense for your situation, contact us or explore our tax services to have an advisor run the numbers for you.
Frequently Asked Questions
What is PTET? PTET (Pass-Through Entity Tax) is an elective state-level tax that lets pass-through entities — S-Corps, partnerships, and LLCs — pay state income tax at the entity level instead of the individual level, converting state tax that would otherwise be capped under the federal SALT limit into a fully deductible business expense.
Which types of businesses can elect PTET? S-Corps, partnerships of all kinds (general, limited, and limited liability partnerships), and LLCs taxed as a partnership or S-Corp are eligible. Sole proprietorships, single-member LLCs without an S-Corp election, C-Corps, and publicly traded partnerships are not.
How much can PTET save in 2026? It depends on the business’s profit, the state’s PTET rate, and how ownership is split. In a California example with $1M in revenue split between two partners, electing PTET saved roughly $34,400 in combined federal tax compared to not electing it.
When is the PTET filing deadline? It varies by state, so check current official guidance each year. For 2026, New York’s PTET election deadline is March 15, and California’s is June 15. Missing the annual deadline generally means you can’t elect retroactively for that year.
Is PTET right for every business? No. It works best for profitable pass-through entities in high-tax states with owners in comparable situations. Businesses operating at a loss, with owners across states that don’t honor the credit, or with a mixed ownership structure (including C-corp partners) may find PTET isn’t worthwhile or adds unnecessary compliance cost.