Save Thousands with Pass-Through Entity Taxes (PTET)

06/16/2025

Are you a small business owner frustrated by the $10,000 cap on state and local tax (SALT) deductions? You're not alone. Since the Tax Cuts and Jobs Act of 2017, many business owners have lost out on substantial deductions.

But here's the good news: over 35 states have enacted Pass-Through Entity Tax (PTET) elections to provide relief.

This post breaks down exactly what PTET is, how it works, and why it could be a powerful strategy for reducing your federal tax bill. If you're an S corporation, partnership, or LLC taxed as a partnership, you don’t want to overlook this.

What Is Pass-Through Entity Tax?

The Pass-Through Entity Tax (PTET) is a state-level workaround to the federal SALT deduction cap. It allows pass-through entities—such as partnerships and S corporations—to elect to pay state income tax at the entity level, rather than passing that income and tax liability down to the individual owners.

Why does that matter?

Because businesses can deduct state income tax paid at the entity level as a business expense, bypassing the $10,000 SALT cap that applies to individuals on their federal returns.

💡 The individual SALT deduction cap applies, but this doesn’t limit deductions by entities that pay taxes directly.

Who Qualifies for PTET?

Generally, you qualify for PTET if you meet all of the following:

• You own a pass-through entity (S corp, partnership, or LLC taxed as such)

• The entity has state-source income in a participating state

• The state has enacted PTET legislation and offers an annual election
  
  

• You make the election timely, usually with the state return or separately as required

Note: Sole proprietors do not qualify because they are not pass-through entities.

Why It Matters: Real Tax Savings

Let’s say you’re a business owner in California. Your S corporation makes $500,000, and your share of the income is $250,000. Without PTET, you’re capped at a $10,000 deduction for state taxes on your personal return.

But if your S corp elects into California’s PTET program (the Elective Tax, per CA Rev & Tax Code §19900), it pays 9.3% on your share ($23,250) at the entity level—fully deductible on the federal return. You then get a credit on your state return for your share of the entity tax paid.

Bottom line?
That $23,250 is now a federal deduction—saving you thousands, depending on your marginal tax rate.

Key States Offering PTET

Each state has its own rules about:

• When and how to make the election

• Who qualifies

• Tax rates and credit mechanisms

• Payment deadlines

As of 2024, over 35 states offer a PTET election. Here are a few examples with important distinctions:

⚠️ Important: Some states require the election before the tax year ends. Others require prepayments to lock in the deduction.

To see if your state has a PTET election, book a free discovery call today.

Real-Life Scenario

A professional services LLC with three partners in New York elected into the PTET program. The entity paid $60,000 in state tax. Each partner got a federal deduction of $20,000—cutting their federal taxes by over $7,000 each. On their NY returns, they received a full credit against their personal income taxes.

Without PTET, they would’ve lost $10,000–$15,000 in deductions due to the SALT cap.

Pros and Cons of PTET

✅ Pros:

• Bypasses the $10K SALT cap on individual returns

• Lowers federal taxable income

• Can be material savings for high-income business owners

• Often no additional net state tax—since you receive a credit or adjustment

❌ Cons:

• Elections are irrevocable for the year

• May trigger estimated tax requirements or early payments

• State rules vary—easy to miss key deadlines

• Can cause issues if owners live in non-conforming states (they might not allow a credit for taxes paid to another state via PTET)

Common Pitfalls to Avoid

1. Missing the election deadline: Some states require the PTET election before March 15, or even before the tax year ends.

2. Failing to prepay: California requires prepayment by March 15 to lock in the election.

3. Nonresident owners in other states: Not all states give credit for PTET paid to another jurisdiction—creating potential double taxation.

4. Overestimating benefits: If your entity has losses, or little income, PTET may not be worth the administrative burden.

How Our Firm Can Help

Our tax professionals can help you:

• Evaluate whether PTET makes sense for your entity

• Track election deadlines and payment requirements

• Estimate your federal and state savings

• Avoid double taxation for multi-state owners

• File and document the PTET properly

We also represent clients in SALT deduction audits and related IRS/state disputes.

Final Thoughts

PTET isn’t just another tax acronym—it’s a valuable opportunity to recover lost deductions and reduce your overall tax burden.

But the rules are complex, and mistakes can be costly. That’s where we come in.

Let us guide you through the maze of state elections, deadlines, and credits—so you can keep more of what you earn.  Sign up today for a free discovery call.