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 individual SALT (State and Local Tax) deduction cap under IRC Section 164(b)(6), the PTET effectively restores the federal deduction the cap would otherwise limit 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 SALT deduction cap was imposed by Section 11042 of the Tax Cuts and Jobs Act (TCJA) of 2017 at $10,000 for tax years 2018 through 2024. The One Big Beautiful Bill Act of 2025 raised the cap to $40,000 for 2025 and $40,400 for 2026 (indexed roughly 1% annually through 2029) — but phases it back down toward a $10,000 floor once modified adjusted gross income exceeds roughly $500,000, with the cap reverting to $10,000 in 2030. For high-income business owners in states with income tax rates ranging from 5% to 13.3%, the phase-down means the cap still binds at exactly the income levels where state tax is largest: a California business owner earning $1 million in pass-through income faces approximately $133,000 in state income tax, of which as little as $10,000 may be deductible individually.
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 limits. The One Big Beautiful Bill Act of 2025 replaced the cap’s scheduled expiration with a higher-but-phased structure through 2029, reverting to $10,000 in 2030 — and it left the entity-level workaround intact (IRS Notice 2020-75 still stands). Because the phase-down hits exactly the high-income owners with the largest state tax bills, the PTET election remains an active planning tool through at least 2030.
For how the PTET election fits the complete picture — alongside entity design, QSBS, and the rest of the DEAPR framework — see Strategic Tax Planning for Entrepreneurs.