Pass-Through Entity Tax (PTET) Election Services

Posted Monday, July 6, 2026

The Tax Cuts and Jobs Act of 2017 capped state and local tax (SALT) deductions at $10,000. If you live in California, New York, New Jersey, Oregon, or pretty much any state where the government expects a meaningful piece of your income, that cap hit hard. You could be paying $30,000, $50,000, or $80,000 in state income taxes and only deduct $10,000 of it on your federal return. The rest? Gone. Non-deductible. Yuck.

But here is the thing – the IRS gave us a workaround. And not a gray-area, cross-your-fingers, hope-nobody-notices workaround. An officially blessed, IRS-approved, “yes this is fine” workaround. It is called the Pass-Through Entity Tax election, or PTET, and if you own a business taxed as an S Corp or partnership, this is one of the most elegant tax strategies available right now.

The concept is straightforward even if the execution requires some coordination. Your S Corp or partnership makes an election to pay state income tax at the entity level instead of you paying it on your personal return. The entity gets a federal deduction for the state taxes it pays – no $10,000 cap. You get a credit on your personal return so you are not double-taxed. Net result? You effectively deduct state income taxes above the SALT cap. Period. Full stop.

What Exactly Is a PTET Election?

Let us break this down without the jargon.

Normally, if you own an S Corp or partnership, the income flows through to your personal tax return. You pay federal and state income tax on that income personally. Under the SALT cap, your state income tax deduction on Schedule A is limited to $10,000 (combined with property taxes). So if your pass-through business generates $300,000 of income and you live in California where the top rate is over 13%, you are paying roughly $35,000 in state income tax but only deducting $10,000. That is $25,000 of state tax you are eating with no federal benefit.

A PTET election flips the payment mechanism. Instead of you personally paying state income tax on that pass-through income, the entity itself pays the state tax. The entity then deducts that payment as a business expense on its federal return. Business expenses are not subject to the SALT cap – that cap only applies to individuals on Schedule A. The entity deduction reduces the income flowing through to you on your K-1. You then claim a credit on your personal state return for the tax the entity already paid, so you are not paying state tax twice.

Sidebar: IRS Notice 2020-75, issued in November 2020, is the notice that blessed this entire approach. The IRS essentially said, “Yes, we know what you are doing, and it is fine.” That is about as close to a permission slip as the IRS ever gives. Nearly every state has since adopted some version of PTET legislation. We love it when the tax code actually works in our favor for once.

Why PTET Matters - The Math That Gets People’s Attention

Let’s say you are an S Corp owner in Oregon. Your business generates $250,000 of net income. Oregon’s top tax rate is around 9.9%. That is roughly $24,750 in state income tax.

Without PTET, you deduct $10,000 on your Schedule A (assuming you have no other SALT deductions eating into that cap – and if you own property, you probably do). The remaining $14,750 in state taxes is non-deductible. At a 32% federal tax bracket, that costs you an additional $4,720 in federal taxes you would not have paid before the SALT cap existed.

With PTET, your S Corp pays the $24,750 to Oregon at the entity level. That full amount is deductible as a business expense on the S Corp’s federal return. Your K-1 income drops from $250,000 to $225,250. You claim a credit on your Oregon personal return for the $24,750 the entity paid. Net federal tax savings? Roughly $4,720. Same income. Same state tax paid. Different pocket it comes out of. Different federal result.

Now scale that up. A business owner in California with $500,000 of pass-through income? The PTET savings can easily exceed $15,000 per year. A two-owner partnership in New York with $1 million of combined income? We are talking $25,000 or more in annual federal tax savings. Every. Single. Year.

Having said that – if your total state income taxes on pass-through income are under or near the $10,000 SALT cap already, the benefit shrinks or disappears. This is not a strategy for everyone. It is a strategy for people whose state tax bill significantly exceeds the cap. Which, if you are a business owner in a high-tax state with decent income, is almost certainly you.

Which States Offer PTET?

Here we go – as of 2026, the vast majority of states with an income tax have adopted some form of PTET legislation. The list includes California, New York, New Jersey, Oregon, Connecticut, Illinois, Maryland, Massachusetts, Minnesota, Wisconsin, Georgia, Arizona, Colorado, and many more. The holdouts are shrinking by the year.

But here is where it gets messy. Every state does it differently.

Some key variations-

  • Election timing. Some states require the election before the start of the tax year. Others allow it with the return. California, for example, has allowed retroactive elections in prior years but keeps changing the rules. New York requires an annual election by March 15.
  • Mandatory vs. elective. Most states make PTET elective, meaning you have to actively choose it. Connecticut was originally mandatory for most pass-through entities. Know which bucket your state falls in.
  • Estimated payment requirements. Many states require quarterly estimated payments at the entity level once the election is made. Miss these and you may owe penalties – at the entity level, not personally.
  • Income thresholds. Some states have minimum income requirements or cap the benefit at certain levels.
  • Rate differences. A few states apply a different tax rate to entity-level taxes than to individual-level taxes. Most use the same rate, but check.
  • Credit mechanics. The credit you receive on your personal return might be refundable, non-refundable, or carry-forward only. This matters if the entity overpays.

Sidebar: If your business operates in multiple states, PTET gets significantly more complex. You may need to make separate elections in each state, coordinate estimated payments across jurisdictions, and ensure the credits are properly claimed on each state return. This is where having a firm that actually understands multi-state taxation pays for itself. Shameless self-promotion? Sure. But also just true.

How the PTET Election Actually Works

The mechanics involve several moving pieces.

Here is the sequence-

  • Step 1: Determine eligibility. Your entity must be a pass-through entity – S Corp, partnership, or LLC taxed as either. C Corps do not qualify because they already pay tax at the entity level. Sole proprietorships do not qualify because there is no entity to make the election.
  • Step 2: Make the election. This is filed with the state, typically by a specific deadline. Some states use the entity’s tax return, others require a separate election form. Deadlines vary wildly. Miss the deadline and you miss the deduction for the entire year. No do-overs (usually).
  • Step 3: Pay estimated taxes at the entity level. Once the election is made, the entity owes quarterly estimated state tax payments based on the pass-through income. These payments need to be coordinated with your overall tax planning because you are no longer making those estimated payments personally.
  • Step 4: Report on the entity return. The entity’s federal return (Form 1120-S or 1065) includes the state tax payment as a deductible expense. This reduces the income reported on your K-1.
  • Step 5: Receive your K-1. Your K-1 will show two things differently than before – lower pass-through income (because the state tax was deducted at the entity level) and a line item for entity-level taxes paid on your behalf.
  • Step 6: Claim the credit on your personal return. On your state individual return, you claim a credit for the PTET paid by the entity. This offsets your personal state tax liability so you are not double-taxed.

The net effect? Same total state tax paid. Same state tax liability. But you have effectively converted a non-deductible personal expense into a deductible business expense. Elegant.

Who Benefits Most from PTET?

Not every business owner needs this, but the profile of someone who benefits significantly is pretty clear-

  • Business owners in high-tax states. California, New York, New Jersey, Oregon, Minnesota, Connecticut – if your state income tax rate is 6% or higher, this is worth evaluating.
  • Pass-through income above $100,000. Below that, depending on your state, the SALT cap might not be binding. Above $200,000 in a high-tax state? This is a must-do.
  • S Corp and partnership owners. Sole proprietors need to form an entity first (which has its own costs and considerations – see our page on S Corp elections).
  • Multi-owner businesses. Some states make PTET easier for multi-member entities. The mechanics are the same for single-member S Corps, but check your state.
  • High-income W-2 earners with side businesses. If you already max out your SALT cap with W-2 withholding and property taxes, every dollar of state tax on your pass-through income is fully non-deductible without PTET.

Let’s say you are a consultant in New Jersey. W-2 job pays $200,000 and your consulting S Corp nets another $150,000. Between your W-2 state withholding and property taxes, your $10,000 SALT cap is already gone before your business income enters the picture. Without PTET, the roughly $10,000 in New Jersey tax on your S Corp income is completely non-deductible. With PTET, the S Corp pays it and deducts it federally. At a 32% federal bracket, that is $3,200 back in your pocket. For checking a box and coordinating some payments.

Common Mistakes We See

This is a pure tax savings strategy with zero operational change to your business. There is no new compliance burden, no restructuring, no different way of running things. It is an election and a payment. Having said that, people get this wrong all the time. Here are the recurring mistakes-

  • Missing the election deadline. This is the big one. Some states require the election before January 1 of the tax year. Others allow it with the return. If you are in a state that requires an advance election and your CPA does not flag it in October or November, you may lose the deduction for the entire year. Gone. We have seen this happen with other firms’ clients who come to us mid-year wondering why nobody told them.
  • Not coordinating estimated payments. When the entity starts paying state tax, you need to stop making personal estimated payments for that same income. Otherwise you are double-paying. This requires active coordination between entity-level and personal-level tax planning. It sounds simple. It is not always simple.
  • Ignoring the QBI interaction. The Qualified Business Income (QBI) deduction under Section 199A is calculated on your pass-through income. When PTET reduces the income on your K-1, it also reduces your QBI deduction. In most cases the federal PTET benefit far exceeds the lost QBI deduction, but the math needs to be run. You do not want to be surprised.
  • Assuming every state works the same way. We cannot stress this enough. California’s PTET is different from New York’s which is different from Oregon’s which is different from Colorado’s. If your CPA handles PTET as a one-size-fits-all checkbox, things will get missed.
  • Failing to make the election for a new entity. If you formed a new S Corp or partnership during the year, the PTET election is not automatic. It needs to be made separately, and the deadline might be different for new entities. Ask us. Seriously, just ask.
  • Not considering PTET for partnerships with out-of-state partners. If your partnership has owners in multiple states, the PTET election may apply differently to each partner depending on their resident state and whether that state grants credits for PTET paid to other states. This is a rabbit hole, but an important one.

How WCG Handles PTET Elections

We approach PTET as part of your overall tax strategy – not as a standalone checkbox. 

Here is what that looks like in practice-

  • Proactive identification. During our tax planning process (typically in the fall), we review every pass-through client for PTET eligibility. If you are a candidate, we flag it, run the numbers, and make a recommendation before any deadlines arrive. We are not scrambling in February. We are planning in October.
  • Election filing. We handle the actual election filing with each applicable state. We track the deadlines (which, again, vary by state), prepare and submit the election forms, and confirm acceptance.
  • Estimated payment coordination. We calculate the entity-level estimated tax payments, coordinate them with your personal estimated payments, and adjust both to avoid double-payment or underpayment penalties. This is where most of the real work happens. The election is the easy part. The payment coordination is where things go sideways if nobody is paying attention.
  • K-1 reporting. We ensure the entity-level tax deduction is properly reflected on your K-1 and that the PTET credit information is correctly reported for your personal return.
  • Personal return credit claim. On your individual state return, we claim the credit for PTET paid by the entity. We reconcile the entity payment against your personal liability, handle any overpayment or carryforward, and make sure you are not leaving money on the table.
  • Multi-state coordination. For clients with business activity in multiple states, we coordinate PTET elections across all applicable jurisdictions. This includes tracking which states allow credits for PTET paid to other states and ensuring no double-taxation slips through.

Sidebar: One thing we hear from new clients coming from other firms is, “Nobody told me about this.” That is frustrating. PTET has been available in most states since 2021 or 2022. If your prior CPA never brought it up and you had significant pass-through income in a high-tax state, you may have left thousands of dollars on the table each year. We cannot go back and fix missed elections in most states, but we can make sure it does not happen going forward.

How PTET Interacts with Your Other Tax Strategies

PTET does not exist in a vacuum. A couple of interactions worth flagging-

  • QBI Deduction (Section 199A). PTET reduces your K-1 income, which in turn reduces your QBI deduction. The QBI deduction is generally 20% of qualified business income. So if PTET reduces your K-1 income by $25,000, your QBI deduction drops by roughly $5,000. At a 32% bracket, that is about $1,600 of offset. Still a net win by a wide margin, but the math needs to be complete.
  • S Corp reasonable salary. PTET does not change anything about your salary requirements. Your officer compensation is still paid and taxed normally. PTET applies to the pass-through income after salary.
  • Estimated tax payments. PTET shifts state tax payments from personal vouchers to entity-level vouchers. Your total state tax does not change, but where and how it is paid does. If you have a bookkeeper or payroll provider making estimated payments on your behalf, they need to know about this.

Sidebar: What about the SALT cap expiring? The original TCJA provisions set the cap to expire after 2025. As of June 2026, Congress has extended or modified various provisions and the cap remains in effect. Even if it eventually increases or disappears, we monitor the landscape and adjust strategies accordingly. For now, PTET remains one of the most impactful strategies available for pass-through business owners.

Key Takeaways

  • PTET is the IRS-approved workaround for the $10,000 SALT cap. It allows pass-through entities to deduct state income taxes at the entity level without the individual cap limitation. This is not a loophole – IRS Notice 2020-75 explicitly blessed it.
  • The benefit scales with income and state tax rates. Business owners in high-tax states with $200,000 or more of pass-through income can save $5,000 to $20,000 or more per year in federal taxes. The math is compelling.
  • Election deadlines vary by state and missing them is costly. Some states require the election before the tax year begins. Others allow retroactive elections. Missing the deadline means missing the deduction for the entire year.
  • Estimated payment coordination is critical. The entity pays state tax, you stop paying it personally for that income. Sounds simple, but miscoordination leads to penalties or double-payments.
  • PTET interacts with QBI, but the net benefit almost always wins. The reduction in QBI deduction offsets some of the PTET benefit, but in most scenarios the federal savings far exceed the QBI cost.
  • This is a zero-disruption strategy. Nothing about your business operations changes. No restructuring. No new compliance. Just an election and payment coordination.
  • Proactive planning is the entire game. If your CPA brings this up in February, it may already be too late for your state. Fall planning is when this gets done right.

FAQs

What does PTET stand for?

PTET stands for Pass-Through Entity Tax. It refers to a state-level tax election that allows S Corps, partnerships, and multi-member LLCs to pay state income tax at the entity level rather than passing it through to the individual owners.

Is PTET legal? It sounds like a loophole.

Completely legal. IRS Notice 2020-75 explicitly confirmed that entity-level state tax payments by pass-through entities are deductible and are not subject to the individual SALT cap. This is not a gray area.

Which states offer a PTET election?

As of 2026, nearly every state with an income tax has adopted some form of PTET legislation. This includes California, New York, New Jersey, Oregon, Connecticut, Illinois, Colorado, Maryland, Massachusetts, Minnesota, Georgia, Arizona, and many more. The specific rules, deadlines, and mechanics vary significantly by state.

Can a sole proprietorship use PTET?

No. PTET requires a pass-through entity – an S Corp, partnership, or multi-member LLC. If you are a sole proprietor, you would need to form an entity and potentially elect S Corp status before you could use PTET. See our S Corp election page for more on that process.

When is the PTET election deadline?

It depends on your state. Some states require the election before January 1 of the tax year. Others allow the election to be made with the entity’s tax return. New York, for example, requires the election by March 15. California has had varying deadlines. We track these for every client.

Does PTET affect my QBI deduction?

Yes. PTET reduces your K-1 income, which in turn reduces your Section 199A QBI deduction. In most cases the federal tax savings from PTET far exceed the lost QBI benefit, but both sides need to be calculated. We model this as part of our tax planning process.

How much can I save with PTET?

It depends on your state tax rate, your income level, and your federal tax bracket. A business owner in California with $300,000 of pass-through income might save $8,000 to $12,000 per year in federal taxes. A partnership in New York with $1 million of combined income could save $25,000 or more. We run the specific numbers during tax planning.

Do I need to make estimated payments differently with PTET?

Yes. Once the PTET election is made, the entity makes estimated state tax payments instead of you making them personally. Your personal estimated payments need to be reduced accordingly. This coordination is a key part of the service we provide.

Can I make the PTET election retroactively?

Some states allow retroactive elections, others do not. California has allowed retroactive elections in certain years. Most states with advance election deadlines do not permit late elections. This is why proactive planning matters – waiting until tax time to think about PTET can mean missing the window entirely.

What happens if the SALT cap goes away?

If Congress eliminates the $10,000 SALT cap, the primary benefit of PTET would diminish because you could once again deduct state taxes in full on your personal return. Having said that, PTET may still offer benefits in certain scenarios depending on how the law changes. As of mid-2026, the cap remains in effect and PTET continues to be one of the most impactful tax strategies available for pass-through business owners.

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We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”

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