Pass-Through Entity Tax (PTET): The SALT Cap Workaround for S-Corp and LLC Owners

By Yarik Yarosh, CPA ·September 5, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The Tax Cuts and Jobs Act (2017) capped the state and local tax (SALT) deduction at $10,000, later raised to $40,000 under the One Big Beautiful Bill Act ($20,000 MFS). For business owners in high-tax states, this cap still turns thousands of dollars in state income tax into a non-deductible expense when total SALT exceeds the cap. The Pass-Through Entity Tax (PTET) is a state-level election that works around the cap. When elected, the S-Corp, partnership, or LLC pays state income tax at the entity level (as a business expense, not a personal tax). The entity gets a federal deduction for the state tax paid, and the individual owners receive a credit on their personal state return for their share of the PTET. The IRS blessed this approach in Notice 2020-75. As of 2025, most states with an income tax offer a PTET election.

✓Key takeaway

How the PTET works:

Without PTET (traditional approach):

S-Corp earns $500,000
Income passes through to owner on K-1
Owner pays state income tax personally (e.g., 9% = $45,000)
Owner also has $10,000 in property taxes, total SALT = $55,000
Owner’s SALT deduction is capped at $40,000
$15,000 in state/local tax is permanently non-deductible
Federal tax cost of the lost deduction: $15,000 x 35% = $5,250

With PTET:

S-Corp earns $500,000
S-Corp elects PTET and pays state tax at the entity level: $45,000
The $45,000 is a business expense (deductible on the federal return)
NOT subject to the $40,000 SALT cap (it’s a business deduction, not a personal one)
Owner receives a state credit for $45,000 on their personal return
Owner’s remaining personal SALT (property tax): $10,000 (under the cap)
Federal tax savings from full deduction: $15,000 x 35% = $5,250

Net benefit: $5,250/year at 9% state tax and $500,000 income (before QBI adjustment).

Who benefits most:

S-Corp, partnership, and LLC owners in high-tax states where total SALT exceeds $40,000
Owners who ALREADY hit the $40,000 SALT cap (from property tax, state income tax, or both)
Higher-income owners (larger state tax payments, more of the SALT cap already consumed)
NOT beneficial for: sole proprietors (PTET is for pass-through entities only), owners in no-income-tax states, owners who don’t itemize

State PTET availability (2025): Most states with an income tax now offer a PTET election. Key states:

New York, New Jersey, California, Connecticut, Georgia, Virginia, Maryland, Massachusetts, Illinois, Colorado, Arizona, and 20+ others
Each state has different rules: opt-in deadlines, payment schedules, credit mechanisms
The election is typically annual and irrevocable for that year
Some states require the election before the tax year begins (January 1 or earlier)

Important limitations:

The PTET reduces the QBI deduction (the state tax paid by the entity reduces the entity’s income available for QBI)
Must model both the PTET savings and the QBI reduction to determine net benefit
The PTET rate varies by state (some states apply a flat rate, others use graduated rates)
All partners/members must consent to the election (in some states)

How much does the PTET save?

Hypothetical example

Round numbers. For current guidance, see 26 U.S.C. 199A (qualified business income deduction). An S-Corp owner, married filing jointly, in New York. Combined state/city tax rate of 10%. S-Corp net income of $600,000. Owner also has $15,000 in property taxes.

Without PTET:

State/city tax (personal): $600,000 x 10% = $60,000
Property taxes: $15,000
Total SALT: $75,000
SALT deduction on federal return: $40,000 (capped)
Non-deductible SALT: $35,000
Federal tax on the non-deductible portion: $35,000 x 35% = $12,250 lost
Owner’s total tax burden includes $12,250 in “phantom” federal tax from the SALT cap

With PTET:

S-Corp pays PTET: $60,000 (entity-level state tax)
Federal deduction: $60,000 (fully deductible as a business expense)
Owner gets a $60,000 credit on their NY personal return (eliminates personal state tax on this income)
Owner’s remaining personal SALT (property tax): $15,000 (under the $40,000 cap)
Owner’s SALT cap is freed up for property taxes

But QBI is reduced:

Without PTET: QBI = $600,000. Deduction: $120,000. Tax savings: $42,000 (at 35%)
With PTET: QBI = $540,000 ($600,000 - $60,000 PTET). Deduction: $108,000. Tax savings: $37,800
QBI reduction cost: $4,200

Net PTET benefit: $12,250 (federal savings from recovering the non-deductible SALT) - $4,200 (QBI cost) = $8,050/year

At $600,000 S-Corp income in New York, the PTET saves $8,050 in federal taxes after QBI adjustment. This is free money for any eligible pass-through owner who makes the election.

Scaling the benefit (10% state rate, $15,000 property taxes assumed):

S-Corp Income	State Tax (10%)	Total SALT	Excess Over $40K Cap	PTET Federal Savings	Net Benefit (after QBI)
$300,000	$30,000	$45,000	$5,000	$1,750 (35%)	~-$350 (QBI cost exceeds savings)
$500,000	$50,000	$65,000	$25,000	$8,750 (35%)	~$5,250
$750,000	$75,000	$90,000	$50,000	$18,500 (37%)	~$13,000
$1,000,000	$100,000	$115,000	$75,000	$27,750 (37%)	~$20,350

At lower incomes where the SALT excess is small relative to the total state tax, the QBI reduction cost can exceed the PTET savings. Model both scenarios before electing.

At higher state tax rates (California, 13.3%, $15,000 property taxes assumed):

S-Corp Income	State Tax (13.3%)	Total SALT	Excess Over $40K Cap	PTET Federal Savings	Net Benefit (after QBI)
$300,000	$39,900	$54,900	$14,900	$5,215 (35%)	~$2,400
$500,000	$66,500	$81,500	$41,500	$15,355 (37%)	~$10,400
$750,000	$99,750	$114,750	$74,750	$27,658 (37%)	~$20,300

In California at $500,000: the PTET saves approximately $10,000-$11,000/year after QBI adjustment.

Election mechanics (vary by state):

State	Election Deadline	Payment Due	Credit Mechanism
New York	March 15	Quarterly estimated payments	Personal credit on IT-653
California	June 15 (first year) or March 15	Quarterly estimated payments	Personal credit on Form 3804-CR
New Jersey	Entity election on CBT-100S/NJ-1065	Quarterly estimated payments	K-1 credit to shareholders
Georgia	Annual election	With entity return	Personal credit

Do NOT skip the QBI reduction analysis. At low state tax rates (3-5%) and high incomes, the QBI reduction can outweigh the PTET savings. A CPA should model both scenarios before electing.

Illustrative numbers only, not a real client and not advice for your facts.

How does business nexus work for state tax purposes?

Nexus is the minimum connection a business must have with a state before that state can impose its taxes. Physical nexus is established by having employees, property, or inventory in a state. Economic nexus, which has expanded significantly since the Supreme Court’s Wayfair decision (2018), can be triggered by exceeding revenue or transaction thresholds in a state (commonly $100,000 in sales or 200 transactions). Once nexus is established, a business may owe the state’s income tax, franchise tax, sales tax collection obligations, and payroll tax withholding for employees working in that state. Many states offer voluntary disclosure agreements (VDAs) that limit look-back periods and waive penalties for businesses that discover they have unfiled state obligations.

Related guides:

How do specified service trades or businesses affect your QBI deduction?

Specified service trades or businesses (SSTBs) including law, medicine, accounting, consulting, financial services, and performing arts face a phase-out of the QBI deduction at higher income levels. For 2025, the QBI deduction phases out for SSTBs between $191,950 and $241,950 for single filers and $383,900 and $483,900 for joint filers, with zero deduction above the upper threshold. Non-SSTB businesses above the income threshold are limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property, but they never lose the deduction entirely. The SSTB classification looks at the principal asset of the business, so if more than 10% of gross receipts come from specified service activities (5% for businesses with over $25 million in gross receipts), the entire business is treated as an SSTB.

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Cite this page

Yarik Yarosh, CPA. "Pass-Through Entity Tax (PTET): The SALT Cap Workaround for S-Corp and LLC Owners." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-pass-through-entity-tax-salt-workaround

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.