PTET Explained: The State Pass-Through Entity Tax SALT Workaround

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: A PTET election lets a partnership or S corporation pay state income tax at the entity level, where it is deductible federally without the personal SALT cap. Owners get a state credit or exclusion. It helps most when owners are above the SALT phasedown or far over the cap.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

When the $10,000 SALT cap arrived in 2018, states got creative. Most income-tax states created an elective pass-through entity tax: instead of the owners paying state income tax on their share of business profits (and hitting the personal cap), the business pays it. IRS Notice 2020-75 confirmed that the entity-level payment is deductible in computing the business's federal taxable income, so it never touches the owners' SALT cap.

The 2025 law raised the personal cap to $40,400 for 2026, but PTET did not go away, and as of October 2026 it was not restricted by that law. This guide explains how PTET works, which states and entities it covers, who still benefits, how the owner credit works and the common pitfalls. Related: SALT cap planning, sole prop vs LLC vs S corp and the tax planning guide.

CPA Warning Label: PTET is the rare tax workaround that the IRS publicly blessed. That does not make the paperwork any less of a hedge maze.

How PTET works

1. The partnership or S corporation makes an annual election with the state, often by a deadline during the tax year or with the return.
2. The entity computes state tax on its qualifying income, usually at or near the state's top individual rate, and pays it, often through estimated payments.
3. For federal purposes, the payment is deducted by the entity as a business tax, reducing the ordinary income passed through to owners on their Schedule K-1s.
4. On the state side, owners get a credit for their share of the PTET paid, or exclude the income, so they are not taxed twice.

Net effect: state tax that would have been a capped personal itemized deduction becomes an uncapped business deduction. The owner also gets the benefit even if they take the standard deduction, because the reduction happens above the line through the K-1.

What it is not

• It is not available to sole proprietors or single-member LLCs taxed as disregarded entities in most states, because there is no separate pass-through entity.
• It does not reduce state tax; it usually costs about the same at the state level, and occasionally more.
• It does not apply to wage income or investment income held outside the entity.

Which states

As of October 2026, most states with an individual income tax had enacted some form of elective PTET, including large states such as California, New York, New Jersey, Illinois, Massachusetts and Georgia. States without an individual income tax have no need for one. Rules vary widely:

State laws changed frequently after the 2025 federal law. Always check the current state revenue department instructions for the year.

Who benefits

Most likely to benefit in 2026

• Owners with MAGI above about $606,000, whose personal cap is reduced to $10,000 by the phasedown. For them PTET works like the pre-2025 world.
• Owners with state taxes far above $40,400 even if under the phasedown.
• Owners who take the standard deduction, since the PTET deduction flows through regardless.
• Owners whose business income lowers their AGI, which can reduce other phaseouts, the 3.8% NIIT for passive owners and the SALT phasedown itself.

Less likely to benefit

• Owners whose total state and local taxes fit comfortably under the $40,400 cap and who itemize. They already deduct their state tax personally.
• Owners in states where the PTET credit is nonrefundable and they cannot use it.
• Owners with significant QBI deductions, where lower qualified business income reduces the 20% deduction slightly.

Illustration: an S corporation owner

Sky owns 100% of an S corporation in a state with a 6% tax rate. In 2026 the S corp earns $900,000 of ordinary income and Sky's MAGI is about $920,000. Sky's personal SALT cap is reduced to $10,000, and Sky also has $15,000 of property tax. Without PTET, state tax on the business income is about $54,000, of which almost nothing is deductible because the $10,000 cap is already used by property tax. With the PTET election, the S corp pays the $54,000 and deducts it, reducing Sky's K-1 income to $846,000. At a 37% federal rate (ignoring the itemized deduction limit and QBI effects), federal savings are about $19,980. Sky's state credit offsets the individual state tax on the same income.

Credit on personal return

On the state return, owners claim their share of the PTET as a credit (or exclude the income). Common issues:

• Federal treatment of the credit or refund: because the entity deducted the tax, a later refund of PTET may be federal income to the entity.
• Timing: the federal deduction is generally taken by the entity in the year paid (for cash-basis entities), so payments made in the following year for the prior year are deductible in the following year. Planning estimated PTET payments before December 31 can matter.
• Nonresident owners: if you live in one state and the business operates in another, your home state may not credit the other state's PTET, or may treat it differently.
• Federal itemized deductions: owners should not also deduct the PTET on Schedule A; it is already deducted at the entity level.

PTET and real estate partnerships

Rental real estate often sits in multi-member LLCs taxed as partnerships, so PTET questions come up for landlords too. Several points are different from an operating business.

• Low or negative taxable income. Depreciation, especially with cost segregation and 100% bonus depreciation for property acquired after January 19, 2025, can make a rental partnership's state taxable income small or negative. PTET on zero income saves nothing.
• Passive losses. If owners already have suspended passive losses, a PTET deduction that increases those losses may not help them this year. It simply adds to the carryforward.
• Gain years. A year with a large sale gain can be the best PTET year, because state tax on the gain is high and the entity-level deduction offsets federal tax on the same gain. Check whether the state applies PTET to capital gains and Section 1231 gains.
• Mixed owners. Investment partnerships often have trusts, other partnerships or retirement-account investors as owners, which may not be eligible or may not benefit.

As always with real estate, model the year rather than assuming the election pays.

Pitfalls

• Missing the election. Many states have strict election deadlines and require estimated payments; late elections may be impossible.
• Owner disagreements. In a multi-owner partnership, the election affects everyone. Some owners may not benefit. Partnership agreements should address who decides and how the cost is allocated.
• Self-employment tax interaction. For partnerships, the reduced ordinary income can slightly reduce self-employment tax for general partners, which is a benefit but should be modeled.
• QBI reduction. The deduction reduces qualified business income and can reduce the 20% QBI deduction.
• Rental property LLCs. Rental partnerships can elect PTET in many states. For passive owners with suspended losses, the benefit may be limited.
• Federal law change risk. Proposals to limit PTET for certain service businesses were debated in 2025. As of October 2026 they were not enacted, but future legislation could change this.
• Cash flow. The entity must have cash to pay the tax, sometimes earlier than owners would have paid personally.

Decision checklist

1. Will the owner's personal SALT cap be reduced, or are state taxes well above $40,400?
2. Is the state credit refundable or fully usable?
3. Do all owners agree and benefit?
4. Can the entity make the required payments on time?
5. What happens to QBI, AGI-based phaseouts and nonresident credits?

PTET elections are entity-level decisions with multi-state consequences. They are a good fit for professional help.