What the Pass-Through Entity Tax (PTET) Election Does for Business Owners in High-Tax States
Sam's List Editorial | 2026-06-23
What the Pass-Through Entity Tax (PTET) Election Does for Business Owners in High-Tax States If you own an S-corp or a partnership in California, New York, New Jersey, or any other high-tax state, you have probably overpaid your federal taxes for years without knowing it. Here is the pass-through entity tax PTET explained in one sentence: it lets your business pay your state income tax at the entity level, so you get a federal deduction the tax code otherwise caps at a few cents on the dollar. That cap has a name — the SALT cap — and it is the whole reason this maneuver exists. Most owners have never heard of PTET. Their CPA never brought it up. And every April, the savings walk out the door. The SALT cap is why you can't deduct your own state taxes Since 2018, the federal deduction for state and local taxes (SALT) — your state income tax plus property tax — has been capped. The 2017 tax law set it at $10,000. The One Big Beautiful Bill Act, signed in 2025, raised that cap to $40,000 for joint filers starting in tax year 2025, with small annual bumps through 2029, then a scheduled return to $10,000 in 2030. There is also a phase-out: the higher cap shrinks for taxpayers with modified AGI above $500,000 (joint), and nobody drops below a $10,000 floor. Here is what that actually means. If you pay $80,000 in state income tax on your business profits, the most you can personally deduct on Schedule A is $40,000 — and if you are a high earner, the phase-out can claw a chunk of that back. The rest is just gone. How the PTET election flips the math The state PTET election moves that tax bill off your personal return and onto the business. Your S-corp or partnership elects to pay the state income tax itself. Because that tax is now a business expense, the entity deducts the full amount on the federal return — no $40,000 cap, no phase-out. The deduction lands in box for your share of pass-through income, lowering the income that flows to your 1040. Then you don't get double-taxed at the state level. The state hands you a credit (or an income exclusion) on your personal return for the tax the entity already paid. Net effect: same state tax bill, but you've converted a capped personal deduction into an uncapped federal business deduction. The IRS blessed this structure in Notice 2020-75, which confirmed that entity-level state taxes paid by a partnership or S-corp are deductible at the entity level. That notice is the legal spine of every state PTET regime. And the 2025 federal law left the workaround fully intact — Congress considered limiting it and chose not to....
