What Is a PTET Election?
A Pass-Through Entity Tax (PTET) election allows pass-through entities (S-Corporations, partnerships, and LLCs taxed as partnerships) to pay state income tax at the entity level rather than having the tax obligation flow through to individual owners' personal returns. Because entity-level state taxes are deductible as a business expense under IRC Section 162 and are not subject to the $10,000 SALT (State and Local Tax) deduction cap imposed by IRC Section 164(b)(6), the PTET effectively circumvents the federal SALT limitation for business owners.
As discussed in "Billionaire Wealth Strategies" (Jim Dew, 2024), Chapter 9, the PTET election falls under the "R" (Reduce) component of the DEAPR framework.
How Does a PTET Election Work?
The $10,000 SALT deduction cap was imposed by Section 11042 of the Tax Cuts and Jobs Act (TCJA) of 2017, effective for tax years 2018 through 2025. For high-income business owners in states with income tax rates ranging from 5% to 13.3%, the cap creates a significant additional federal tax burden. A business owner in California earning $1 million in pass-through income faces approximately $133,000 in state income tax, of which only $10,000 is deductible on the federal return under the SALT cap.
The PTET election shifts the state tax payment from the individual level to the entity level. The entity pays state income tax and deducts the payment as an ordinary business expense with no dollar limitation. The individual owner receives a credit on their state personal return for the tax already paid by the entity, preventing double taxation.
The IRS confirmed the validity of the PTET approach in IRS Notice 2020-75, stating that specified income tax payments made by a partnership or S-corporation to a state or locality are deductible by the entity in computing its non-separately stated income or loss. As of 2025, 36 states and the District of Columbia have enacted PTET provisions, though the specific rules, deadlines, and mechanics vary by state.
The PTET election must typically be made before the end of the tax year, though some states allow elections on the entity's tax return filed after year-end. The election is made annually and applies to all consenting members or shareholders (some states require unanimous consent; others allow partial elections).
When Do Entrepreneurs Use PTET Elections?
Business owners in high-tax states such as California (13.3%), New York (10.9%), New Jersey (10.75%), and Oregon (9.9%) receive the largest benefit because the SALT cap restricts the most deduction value. The PTET restores the full state tax deduction at the entity level.
Any pass-through entity owner affected by the SALT cap benefits from the PTET when state income tax exceeds $10,000. S-Corporations, partnerships, and multi-member LLCs in states that have enacted PTET provisions are eligible. Sole proprietors and single-member LLCs generally do not qualify unless the state specifically includes them.
Combined strategies pair the PTET with Section 199A and entity structuring for maximum federal tax reduction. The PTET deduction reduces the entity's taxable income, which may also reduce the QBI base for Section 199A purposes. A comparative analysis determines whether the SALT recovery exceeds any reduction in the QBI deduction.
How Does Dew Wealth Approach PTET Planning?
The PTET election is frequently overlooked in standard tax preparation because the election requires entity-level planning and coordination between the business tax return and the individual return. Many CPAs who prepare individual returns may not coordinate the election with the entity return preparer, particularly for multi-state businesses.
The Fractional Family Office® ensures the PTET election is made by the state-specific deadline, that estimated payments are made at the entity level rather than the individual level, and that the corresponding credit flows correctly to the individual return. For business owners operating in multiple states, the coordination becomes more complex, as each state's PTET rules differ on eligibility, election timing, and credit mechanics.
The PTET does not create new tax savings; it restores a deduction that the SALT cap eliminated. If the SALT cap expires after 2025 as currently scheduled under the TCJA, the PTET may become unnecessary. However, legislative uncertainty means the PTET remains an active planning tool for 2025 and beyond.
Frequently Asked Questions
Does my state offer a PTET election?
Is there a downside to the PTET election?
What happens if the SALT cap expires?
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