Definition
The PTET election allows pass-through entities (S-Corps, partnerships, LLCs) to pay state income tax at the entity level rather than having the tax flow through to individual owners' personal returns. Because entity-level state taxes are a deductible business expense not subject to the $10,000 SALT (State and Local Tax) cap, this effectively circumvents the cap for business owners.
How It Works
Under the SALT cap imposed by the 2017 Tax Cuts and Jobs Act, individuals can only deduct $10,000 in state and local taxes on their federal return. For high-income business owners in states with income tax rates of 5-13%, this cap creates a significant additional federal tax burden.
The PTET election shifts the state tax payment from the individual level to the entity level. The entity pays state tax and deducts it as a business expense (unlimited deduction). The individual owner receives a credit on their state return for the tax paid by the entity, avoiding double taxation.
Over 30 states have enacted PTET provisions, and the IRS confirmed the approach in Notice 2020-75.
When Entrepreneurs Use This
- Business owners in high-tax states: California, New York, New Jersey, and other states with rates above 5%
- Any pass-through entity owner affected by the SALT cap: S-Corps, partnerships, multi-member LLCs
- Combined with other strategies: PTET works alongside Section 199A and entity structuring for maximum benefit
Dew Wealth Perspective
Many CPAs still fail to recommend the PTET election because it requires entity-level planning and coordination between the business tax return and the individual return. The Linchpin Partner ensures the election is made timely and that the credit flows correctly to the individual return.