Pass-Through Entity Tax (PTET) Election: Workaround for the SALT Cap

How the PTET election works:

Without PTET (default):

• S-Corp or partnership income flows through to the owner’s personal return
• Owner pays state income tax on the personal return
• State income tax is an itemized deduction, capped at $40,000 (SALT cap)
• If total SALT exceeds $40,000: the excess provides NO federal tax benefit

With PTET election:

• The S-Corp or partnership elects to pay state income tax at the entity level
• The entity-level tax payment is an ordinary business expense (deductible on the entity’s federal return)
• This deduction is NOT subject to the $40,000 SALT cap (it is a business deduction, not a personal itemized deduction)
• The owner receives a credit or deduction on their state personal return for the tax paid by the entity (to avoid double taxation at the state level)

Federal benefit:

• The entity-level tax payment reduces the S-Corp’s or partnership’s taxable income
• This flows through to the owner’s K-1 as lower ordinary income
• The owner’s federal tax bill is reduced by the entity-level payment x the marginal federal rate

Example:

• State income tax on passthrough income: $50,000
• Without PTET: $40,000 deductible (SALT cap), $10,000 non-deductible
• Federal tax lost on $10,000: $10,000 x 24% = $2,400
• With PTET: full $50,000 deductible as business expense
• Federal tax saved: $10,000 x 24% = $2,400

States offering PTET elections (as of 2025): Over 30 states, including: California, New York, New Jersey, Connecticut, Illinois, Georgia, Maryland, Massachusetts, Minnesota, Oregon, Wisconsin, and many others. Each state has its own rules, rates, and election deadlines.

Election timing:

• Some states require the election before the tax year begins (California: March 15 of the tax year)
• Others allow retroactive elections (New York: with the filing of the return)
• Miss the deadline = miss the benefit for that year
• The election is typically made annually (not a permanent election)

QBI interaction: The PTET payment reduces S-Corp income, which reduces the owner’s QBI. The QBI deduction (20%) is based on the lower income. The net benefit of PTET is: PTET savings minus the lost QBI deduction.

At a 24% marginal rate with 20% QBI deduction:

• PTET savings: $10,000 x 24% = $2,400
• Lost QBI: $10,000 x 20% x 24% = $480
• Net savings: $1,920