What is the Pass-Through
Entity Tax (PTET)?
A powerful federal tax strategy for business owners — and one that just became more important with the new $40,000 SALT deduction cap.
2025 Tax Legislation Update: New $40,000 SALT Cap
The recently passed legislation raises the SALT deduction cap from $10,000 to $40,000 for taxpayers under the income threshold (phasing out above ~$500,000 of MAGI). This changes — but does not eliminate — the calculus around PTET elections. For many business owners, PTET remains highly valuable. For others, the analysis shifts. Here's what you need to know.
The SALT Workaround — Still Relevant
The 2017 Tax Cuts and Jobs Act capped the deduction for State and Local Taxes (SALT) at $10,000 on your personal return. For business owners in high-tax states, this meant paying federal taxes on income that had already been consumed by state taxes.
States responded by creating the Pass-Through Entity Tax (PTET) — a mechanism allowing partnerships and S Corps to pay state income tax at the entity level. Because it's a business expense, it's fully deductible for federal purposes, bypassing the personal SALT cap entirely.
The new $40,000 SALT cap (for qualifying taxpayers) changes who benefits and by how much — but for many business owners, especially those in high-tax states or above the income phase-out, PTET remains one of the most valuable federal deductions available.
The core mechanic: you pay your state taxes with business dollars instead of personal dollars, converting a capped personal deduction into an unlimited business deduction.
How PTET Works: 4 Steps
Election
The business elects to pay state income tax at the entity level, based on its net income.
Payment
The business pays the state tax (e.g., 9.3% in California) using business funds, not personal funds.
Federal Deduction
The payment is deducted from the business's federal taxable income, reducing the K-1 profit flowing to you.
State Credit
You receive a credit on your personal state return for the tax already paid by the business — no double taxation.
Who Does PTET Still Help?
The new cap raises the bar — but PTET is still a meaningful strategy for many business owners.
Still Highly Beneficial
- →Business owners with MAGI above ~$500K (phase-out of new cap)
- →High-tax states (CA, NY, NJ, OR) where state taxes easily exceed $40K
- →Partnerships and S Corps with multiple partners or shareholders
- →Owners with significant business income relative to salary
Requires Re-Analysis
- →Owners with MAGI under ~$500K in lower-tax states
- →Those whose total state + local taxes fall under $40K
- →States where the PTET credit doesn't fully offset the entity-level tax
- →Any situation where the analysis wasn't done recently
Standard Deduction Filers — PTET Always Helps
If you take the standard deduction (most taxpayers do), the $40,000 SALT cap is completely irrelevant to your situation. You were never deducting SALT on your personal return to begin with. PTET still benefits you because the state tax deduction happens at the entity level — it reduces the K-1 income flowing to your personal return before you ever see it. That means lower federal taxable income regardless of how you file. For standard deduction filers, PTET is almost always a no-brainer.
If you elected PTET before the new cap, the analysis needs to be revisited. If you haven't elected PTET yet, now is the time to run the numbers with your CPA — the right answer depends heavily on your state, income level, and whether you itemize.
What You Need to Know
Understanding the nuances of PTET is critical to maximizing your tax savings.
Federal Tax Savings
By paying state tax with business funds, you reduce your federal taxable income — saving at your marginal rate on those dollars, which can be 32–37% for high earners.
New $40K SALT Cap
The raised cap benefits taxpayers under the ~$500K MAGI phase-out. For those above it, PTET remains the only way to fully deduct state taxes at the federal level.
K-1 Reporting
PTET payments are deducted at the entity level and flow through your K-1. You receive a corresponding state credit on your personal return to avoid double taxation.
State-Specific Rules
Not all states allow retroactive enrollment. Deadlines, election mechanics, and credit structures vary widely — and some states don't offer PTET at all.
Individual Analysis Required
With the new cap, the benefit calculation depends on your MAGI, state tax rate, business income, and SALT already paid. This is not a one-size-fits-all decision.
Timing is Everything
Payments must be made within the calendar year to generate a current-year federal deduction. Estimated PTET payments are critical for cash-basis businesses.
Not All That Glitters is Gold
PTET is powerful — but tricky. State-specific complexity can turn a good strategy into a costly mistake.
California
You must pay the greater of $1,000 or 50% of your prior year PTET by June 15 to preserve your right to elect. Miss the deadline and you lose the entire year.
QBI Deduction Impact
PTET reduces your net business income, which in turn reduces your Qualified Business Income (QBI). While the federal tax savings usually outweigh the reduced 20% QBI deduction, the exact net benefit must be modeled.
Irrevocability
In states like Michigan, the election is irrevocable for 3 years. Make sure you want to stay in before you elect.
Penalties & Refunds
Some states charge significant underpayment penalties or won't refund excess payments — rolling them forward instead.
Post-2025 Re-Evaluation
Any PTET election made under the old $10K SALT cap should be re-evaluated now. The higher cap may reduce — or eliminate — the benefit depending on your situation.
Ready to run the PTET numbers for your business?
The new SALT cap changes the analysis for many business owners. We'll review your income, state, and structure to determine whether PTET still makes sense — and by how much.