What are PTET (Pass Through Entity Taxes) and the PTET Election?
Pass-Through Entity Taxes (PTET), also known as PTE taxes, are optional (in most cases) state-level taxes that certain business entities can elect to pay directly at the entity level. These apply primarily to pass-through entities like partnerships, multi-member LLCs taxed as partnerships, and S corporations.
They were introduced by many states as a workaround to the federal State and Local Tax (SALT) deduction cap. From 2018 through 2024, this cap limited individual itemized deductions for state and local taxes to $10,000 ($5,000 for married filing separately). In 2025, under recent tax legislation (the “One Big Beautiful Bill Act”), the cap has increased to $40,000 ($20,000 for married filing separately), with a phaseout for modified adjusted gross income (MAGI) over $500,000—reducing the cap gradually until it hits $10,000 at higher incomes. The higher cap applies through 2029 before potentially reverting.
How Does the PTET Election Work? I discuss what and how PTET taxes work a bit more in this video.
Normally, income from pass-through entities flows to owners’ personal tax returns, where they pay state income tax individually. Those personal state taxes are subject to the federal SALT cap if itemizing ($40,000 in 2025 on Schedule A of the 1040).
With a PTET election:
The entity pays the state tax on its qualified income.
This payment is a fully deductible business expense on the federal return (no SALT cap applies to business deductions).
Owners receive a credit (or income exclusion in some states) on their personal state return for their share of the PTET paid, making it largely revenue-neutral for the state.
Result: Owners’ federal taxable income decreases, leading to federal tax savings.
The election is typically annual, irrevocable for the year, and must be made by a specific deadline (varies by state, often early in the year or with the return). Over 35 states (plus New York City in some forms) offer a PTET regime as of late 2025, with rules varying significantly—e.g., tax rates, eligible income, credit percentages, and whether mandatory or elective.
Pros of Electing PTET
Federal tax savings: Full deduction at the entity level bypasses (or mitigates) the individual SALT cap, reducing federal taxable income (savings up to 37% federal rate).
Lower AGI benefits: Can enable more deductions/exclusions elsewhere (e.g., Roth contributions, rental losses, reduced Net Investment Income Tax).
Still valuable in 2025: For owners in high-tax states with SALT payments exceeding the phased $40,000 cap.
Multi-state help: Aids with nonresident withholding and composite filings.
Refundable credits in some states: Overpayments can be refunded. This is very important to pay attention too, as now all states are refundable (meaning if you prepay too much, you will not receive a refund).
Neutral for states: They collect the same revenue overall. States will likely just collect on your state taxes early.
Cons of Electing PTET
Not always beneficial: Minimal/no savings if owners don’t itemize, are below the SALT cap, or in low-tax states—requires modeling per owner/state. States like Florida and Texas do not have State taxes, therefore they are not as beneficial to file a PTET election.
Added complexity: Annual elections (often irrevocable), separate filings/payments, owner consents, allocation tracking.
Cash flow impact: Entity pays taxes earlier (estimated payments often required).
Multi-state/residency issues: Resident state may not fully credit PTET from another state; nonresidents could face double taxation risks.
Less than 100% credit in some states: E.g., 90-95%, eroding benefits.
Ineligibility for some owners: Corporate or tiered entity owners often can’t claim credits.
Overpayment risks: Refunds in loss years may be limited or federally taxable.
Administrative burden: Higher compliance costs.
PTET remains a useful tool for many pass-through business owners in high-tax states, especially those affected by the SALT phaseout. However, with the 2025 higher cap, benefits are reduced for some—always run the numbers for your specific situation, owners, and states involved.
