The short answer: A pass-through entity tax, or PTET, is a state-level election that lets your S corporation, LLC, or partnership pay state income tax at the business level, where it is fully deductible on the federal return, instead of at the owner level where the SALT cap applies. The owner then claims a corresponding state tax credit. The workaround survived the One Big Beautiful Bill Act intact, but the higher $40,400 SALT cap means it is no longer automatically worth electing. For high earners it still delivers substantial savings. For many mid-income owners, the advantage has narrowed to almost nothing.
If you made a PTET election in 2021 or 2022 and have not revisited it since, you are running the arithmetic on rules that no longer exist. Two things changed. The federal cap on state and local tax deductions quadrupled, and a proposal that would have stripped the workaround from service businesses came within weeks of becoming law before being dropped. Understanding how pass-through entities are taxed is the starting point, but the PTET decision now requires its own annual review.
This article explains what the PTET is, how the mechanic works, exactly what changed under OBBBA, and how to tell whether the election still earns its keep. Two worked examples show one owner for whom it clearly does and one for whom it no longer does.
Would your PTET election survive one of these five?
Countsure reviews existing elections against your state’s current rules, checks the estimated payment position, and runs the comparison on your projected income before the deadline rather than after it.
Key Takeaways
- A PTET shifts state income tax from the owner’s personal return to the entity, where it is deductible as an ordinary business expense and escapes the individual SALT cap.
- OBBBA preserved the workaround for all pass-throughs, including specified service businesses. An earlier House draft would have removed it for SSTBs but was dropped before enactment.
- The SALT cap is $40,400 for 2026, rising roughly 1% a year through 2029, then reverting to $10,000 in 2030.
- The cap phases down by 30 cents per dollar of MAGI above $505,000, bottoming out at $10,000, which is why PTET remains valuable for high earners.
- Owners with MAGI comfortably below the threshold and modest state tax bills may now be better off without the election.
- PTET reduces qualified business income, which shrinks the Section 199A deduction. That offset belongs in every calculation.
How the Pass-Through Entity Tax Actually Works
The mechanic has three steps and is easier to follow than the terminology suggests.
First, the entity elects in. An S corporation, partnership, or multi-member LLC makes an annual election with the state to pay state income tax at the entity level on its owners’ distributive shares of income.
Second, the entity deducts the payment. That state tax becomes an ordinary and necessary business expense of the entity, deductible in full on the federal return before income passes through to the owners. Because the deduction happens at the entity level, the individual SALT cap never touches it.
Third, the owner claims a credit. The state gives each owner a credit, refundable in some states and non-refundable in others, for their share of the tax the entity paid. The owner is not taxed twice on the same income.
The IRS blessed this structure in Notice 2020-75, issued in November 2020, confirming that PTET payments made by a partnership or S corporation are deductible by the entity regardless of the individual SALT cap. That notice is what turned a handful of state experiments into a nationwide practice.
One point worth noting: the PTET is available only to pass-through entities. A C corporation already deducts its state income tax at the entity level, so it never needed a workaround. This is one of several places where the S corporation and C corporation comparison turns on federal deduction mechanics rather than headline rates.
Why PTET Exists: A Short History of the $10,000 Problem
The Tax Cuts and Jobs Act capped the individual deduction for state and local taxes at $10,000 beginning in 2018. For a business owner in a high-tax state, that was a significant change. An owner paying $60,000 in state income tax on business profits could deduct $10,000 of it and no more.
States responded. If the tax were imposed on the business rather than the individual, it would be a business expense, and business expenses have never been subject to the SALT cap. Connecticut moved first in 2018. After IRS Notice 2020-75 removed the legal uncertainty, adoption accelerated sharply.
As of 2026, more than 36 states plus the District of Columbia have enacted some form of pass-through entity tax. The names differ, with California calling it the pass-through entity elective tax and New Jersey calling it the Business Alternative Income Tax or BAIT, but the underlying logic is the same everywhere.
The distinction between entity-level and owner-level taxation runs through many areas of pass-through planning. It is the same distinction that drives the pass-through entity premium applied in business valuations.
What OBBBA Changed, and What It Didn't
The One Big Beautiful Bill Act, signed on July 4, 2025, was the most consequential tax legislation since 2017 for pass-through owners. Two things mattered here.
What did not happen
The draft that emerged from the House Ways and Means Committee would have eliminated the PTET deduction entirely. It was then modified to preserve the workaround for qualified trades or businesses while denying it to specified service trades or businesses: accounting, law, health care, consulting, and financial services.
That provision was dropped before final passage. The AICPA and CPA societies across 53 states and jurisdictions lobbied against it, arguing it singled out particular professions. As enacted, OBBBA leaves the PTET workaround fully available to all pass-through entities, service businesses included.
What did happen
The SALT cap itself was substantially raised, which is precisely what complicates the decision.
Tax year |
SALT cap |
Phase-out begins (MAGI) |
|---|---|---|
2017 and earlier
|
No cap
|
Not applicable
|
2018 to 2024
|
$10,000
|
No phase-out
|
2025
|
$40,000
|
$500,000
|
2026
|
$40,400
|
$505,000
|
2027 to 2029
|
Approx. +1% per year
|
Approx. +1% per year
|
2030 onward
|
$10,000
|
No phase-out
|
The cap is reduced by 30 cents for every dollar of modified adjusted gross income above the threshold, but it never falls below $10,000. Working through the arithmetic for 2026: the cap has $30,400 of room to burn off, which at 30 cents per dollar takes about $101,333 of excess income. So the cap is fully ground down to the $10,000 floor once MAGI reaches roughly $606,000.
Two Owners, Two Different Answers
The following examples assume married filing jointly, an illustrative 6% state income tax, and tax year 2026. Real results depend on your state and your full return.
Owner A: PTET still wins clearly
Kate owns an S corporation in a 6% state. Her MAGI is $800,000 and her share of state income tax on business profits is $48,000.
Her MAGI exceeds the $505,000 threshold by $295,000. At 30 cents on the dollar, that would reduce her cap by $88,500, far more than the $40,400 starting point, so she lands on the $10,000 floor.
Without a PTET election, Kate deducts $10,000 of state tax. At a 37% marginal rate, that is worth $3,700.
With a PTET election, the entity deducts the full $48,000 before income reaches her return. At 37%, that is worth $17,760.
Her net advantage is roughly $14,060 a year, before accounting for the QBI offset discussed below. For Kate, the election is straightforward.
Owner B: PTET is now close to a wash
Daniel owns an LLC taxed as a partnership in the same state. His MAGI is $300,000, his share of state income tax is $18,000, and he pays $7,000 in property tax.
Because his MAGI is well below $505,000, the full $40,400 cap is available to him. His total state and local taxes come to $25,000, comfortably under it.
Without a PTET election, Daniel deducts the entire $25,000 personally. At a 24% marginal rate, that is worth $6,000.
With a PTET election, the entity deducts $18,000 (worth $4,320) and he still deducts $7,000 of property tax personally (worth $1,680). Total: $6,000.
Identical outcome, and the election adds an annual filing obligation, estimated payment deadlines, a credit to track, and a reduction in his QBI deduction. For Daniel, electing in would make him worse off.
This is the shift most owners have not absorbed. Before 2025, the PTET was close to a default yes for anyone in a state that offered it. Now it is a calculation, and the answer changes with income.
The threshold effects here are sharp. A modest change in income can flip the answer. This is exactly the kind of item worth reviewing during year-end tax planning rather than at filing time, when the election deadline has usually passed.
The Phase-Out Trap Between $505,000 and $606,000
There is a band of income where the marginal cost of an extra dollar is much higher than your bracket suggests, and most owners never see it coming.
Inside the phase-down range, every additional dollar of MAGI does two things: it gets taxed at your marginal rate, and it destroys 30 cents of SALT deduction. That lost deduction is itself taxed at your marginal rate.
So the effective cost of a marginal dollar is your stated rate multiplied by 1.30. An owner in the 35% bracket faces an effective marginal rate of about 45.5% inside that band. In the 32% bracket, roughly 41.6%.
Two practical consequences follow. First, deferring income or accelerating deductions to stay below $505,000 can be worth real money in a borderline year. Second, and this is the part that connects back to the election, a PTET election reduces the income that flows to your personal return, which can pull your MAGI down out of the phase-down band entirely. In that situation, the election delivers two benefits at once.
PTET Reduces Your QBI Deduction: The Offset Most Owners Miss
Here is the complication that gets left out of most PTET discussions.
When the entity pays and deducts state tax, the income passing through to owners falls by that amount. That reduced figure is also your qualified business income for Section 199A purposes. A smaller QBI means a smaller 20% deduction.
For 2026, the QBI deduction begins to phase out at $403,500 of taxable income for joint filers and $201,750 for single filers. Specified service businesses lose it entirely at $553,500 and $276,750, respectively. OBBBA made the deduction permanent and widened the phase-in ranges, and it added a $400 minimum deduction for active owners with at least $1,000 of QBI.
The rough arithmetic: if a PTET election reduces your QBI by $48,000, you lose 20% of that, or $9,600 of deduction, worth about $3,552 at a 37% rate. Set against a $17,760 federal benefit, the election still wins comfortably. But the offset is real, and it matters most in marginal cases like Daniel’s, where it can tip a wash into a loss.
Owners whose income already exceeds the QBI phase-out have no offset to worry about, because they were not claiming the deduction anyway.
It Is a State-by-State Patchwork
There is no federal PTET. Each state writes its own, and the differences are substantial: rates, election deadlines, whether the credit is refundable, how estimated payments must be timed, and whether the regime is permanent or scheduled to lapse.
A few illustrations of how much the landscape moves:
- Illinois removed its sunset provision in December 2025, making its PTET permanent after years of uncertainty.
- Virginia extended its sunset by a single year, to January 1, 2027, and further action remains uncertain.
- Minnesota’s PTET sunset at the end of 2025 and is not available for 2026 absent reenactment.
- California applies a 9.3% rate to qualified net income and relaxed its payment-failure rules for 2026 through 2030, where a missed estimated payment previously invalidated the entire election.
The practical takeaway is that a PTET strategy built two or three years ago may not reflect your state’s current rules. Multi-state owners face an additional layer of complexity, because resident credits for taxes paid to other states do not always interact cleanly with PTET regimes, and some states refuse credit for another state’s entity-level tax.
Owners considering where to form or expand should factor PTET availability into the decision alongside the other considerations that go into setting up a US LLC, though it should rarely be the deciding factor on its own.
Five Ways PTET Elections Go Wrong
In practice, most PTET problems are procedural rather than analytical.
- Missing the election deadline. Most states require the election before or during the tax year, not at filing. Deciding in March that last year’s election would have been useful is usually too late.
- Botching estimated payments. Several states tie the validity of the election to timely and correctly sized estimated payments. A late or short payment can void the election for the entire year.
- Multi-state credit mismatches. A resident of one state who owns an interest in an entity electing PTET in another may not receive a full resident credit, resulting in genuine double taxation.
- Nonresident owner complications. Some regimes treat resident and nonresident owners differently, and a PTET election that helps the majority owner can leave a minority nonresident owner worse off.
- Cash-basis timing. The federal deduction generally follows payment, so an entity that elects in but pays after year-end may not get the deduction in the year it expected.
Would your PTET election survive one of these five?
Countsure reviews existing elections against your state’s current rules, checks the estimated payment position, and runs the comparison on your projected income before the deadline rather than after it.
The 2030 Cliff
Under current law, the SALT cap reverts to $10,000 for all filers in 2030, regardless of income and without any phase-out. If that holds, PTET becomes broadly valuable again for anyone paying meaningful state income tax, not just high earners.
That has a planning implication now. If you are on the fence for 2026 through 2029, it is worth keeping your PTET infrastructure in place, meaning the election mechanics, the estimated payment process and the credit tracking, rather than dismantling it and rebuilding in 2030. A future Congress may of course change the schedule, but the reversion is what the statute currently says.
Frequently Asked Questions
1. What is a pass-through entity tax (PTET)?
A pass-through entity tax is an elective state-level tax under which an S corporation, partnership, or multi-member LLC pays state income tax on its owners’ shares of business income at the entity level. The entity deducts that payment as a federal business expense, which is not subject to the individual SALT cap, and each owner claims a state tax credit for their share. The IRS confirmed the structure in Notice 2020-75.
2. Did OBBBA eliminate the PTET SALT cap workaround?
No. An early House draft would have removed the deduction for specified service trades or businesses such as accounting, law, and consulting firms, but that provision was dropped before the bill was signed on July 4, 2025. The workaround remains available to all pass-through entities, service businesses included.
3. Is PTET still worth it with the $40,400 SALT cap?
It depends on income. Owners with MAGI above roughly $606,000 are pushed to the $10,000 SALT floor, so the PTET still delivers substantial savings. Owners with MAGI below $505,000 whose total state and local taxes fit within the $40,400 cap may see little or no benefit. The middle range requires an actual calculation.
4. Which states have a pass-through entity tax?
More than 36 states plus the District of Columbia had PTET regimes as of 2026. The names and mechanics vary, including California’s pass-through entity elective tax, New Jersey’s BAIT and New York’s PTET, and the rules change frequently, with some states legislating sunsets and others removing them. Confirm your state’s current position for the specific tax year.
5. Does PTET reduce my QBI deduction?
Yes. The state tax deducted at the entity level reduces the income that flows through to owners, and that reduced figure is your qualified business income. A smaller QBI produces a smaller Section 199A deduction. The offset is generally worth about 20% of the PTET amount multiplied by your marginal rate, and it should be included in any comparison. Owners already above the QBI phase-out are unaffected.
6. Can specified service businesses still use PTET?
Yes. Accounting firms, law firms, medical practices, consultancies, and financial services businesses retain full access to PTET elections under OBBBA as enacted. The proposed restriction on SSTBs did not make it into the final legislation.
7. What happens to the SALT cap in 2030?
Under current law the cap reverts to $10,000 for all filers in 2030, with no phase-out and no income-based variation. That would restore the PTET’s value for a much wider group of owners than benefit from it today. Congress could change the schedule, but the reversion is what the statute provides.
8. When do I have to make the PTET election?
Deadlines are set by each state and most fall before or during the tax year rather than at filing. Many states also require timely estimated payments as a condition of a valid election. Because the deadline usually passes before you file, the PTET decision belongs in year-end planning, not filing season.
Reviewing the Election for This Year
The pass-through entity tax remains one of the most valuable planning tools available to US business owners, and it survived a legislative near-miss in 2025. What changed is that it stopped being automatic. The higher SALT cap means the answer now depends on your income, your state, your QBI position, and the specific year. An election that was obviously right in 2022 may be doing nothing for you in 2026, and the only way to know is to run the numbers again.
- Rerun the comparison every autumn, before your state’s election deadline, using projected income for the year rather than last year’s figures.
- Check your MAGI against $505,000 first. Above roughly $606,000 you are sitting on the $10,000 floor, and the election almost certainly pays.
- Subtract the QBI offset before deciding. It runs to roughly 20% of the PTET amount, valued at your marginal rate, and it is what tips a marginal case into a loss.
- Confirm your own state’s rules for the specific year. Sunsets, rates and estimated payment conditions have all moved recently, and a strategy built three years ago may no longer hold.
- Keep the election infrastructure in place through 2029 even in a year when the benefit is thin, because the cap reverts to $10,000 in 2030.
Get those five right and the PTET stops being a decision you inherited and starts being one you make.
Have a PTET election you have not tested against the current rules?
Countsure works with business owners and CPA firms across the United States on entity structuring, multi-state tax planning, and year-end elections. If you have a PTET election in place and have not tested it against the current rules, or you are deciding whether to make one for the first time, we can run the comparison.
Parth Shah, Managing Director
(CPA-US, FCA, RV-S&FA, DISA)
Parth Shah who is head of Accounts and Book keeping has experience of more than 10 years. A Certified Public Accountant – US, fellow Chartered Accountant, Registered Valuer and Diploma in Information System Audit.
