Pass-through entity tax elections and the SALT cap

You can only deduct so much state and local tax on your personal federal return. A partnership or S corp can deduct state income tax it pays itself, with no cap. A pass-through entity tax, or PTET, is a state election that moves your state income tax from your return to the company's, so it lands on the uncapped side.

The 2026 SALT cap

The cap is in 26 U.S.C. 164(b)(7). For tax years beginning in 2026 it is $40,400. That was $40,000 for 2025, and it rises 1% a year through 2029. In 2030 it falls back to $10,000.

High earners get less. If your modified AGI is over $505,000 in 2026, the cap drops by 30% of the excess, but never below $10,000. For married filing separately, both numbers are halved.

So an owner with $600,000 of income is close to the old $10,000 cap anyway. That is who a PTET helps most.

What the IRS allows

The IRS position is in Notice 2020-75. A state income tax imposed on and paid by a partnership or S corp is deductible by the entity "in computing its taxable income for the taxable year in which the payment is made." That holds even when the tax only applies because the entity elected it, and even when the owners get a state credit for it.

The notice also says the payment "is not taken into account in applying the SALT deduction limitation" to the owners. It shows up as lower ordinary income on your K-1, not as a separate deduction. It covers payments made on or after November 9, 2020.

How it works, step by step

1. The partnership or S corp elects into the state's PTET, usually once a year.
2. It pays state tax at the entity level on the owners' share of income.
3. It deducts that tax on its federal return, so each owner's K-1 income is smaller.
4. Each owner claims a state credit for their share, which offsets their personal state tax.

You pay roughly the same state tax as before. The federal deduction is the win.

Example: a California S corp

A married couple owns an S corp in California. Its qualified net income is $600,000, and their modified AGI would be about $600,000 without the election.

California's PTE elective tax is 9.3% of qualified net income. That is $55,800. The S corp deducts it federally, so their K-1 income falls to $544,200. They claim a $55,800 nonrefundable credit on their California return with Form 3804-CR. Unused credit carries forward up to 5 years.

At the 32% bracket, which for joint filers in 2026 runs from $403,550 to $512,450 of taxable income per Rev. Proc. 2025-32, $55,800 of deduction is worth about $17,856. Their lower AGI also lifts their SALT cap from $11,900 to $28,640, which leaves room for property tax.

A couple at $250,000 with $15,000 of state tax gets much less. They are already under the $40,400 cap. The election only helps if they take the standard deduction ($32,200 for joint filers in 2026) or their total state and local taxes run past the cap.

Which states have one

New York keeps a list of states whose PTETs it treats as similar for its resident credit. As of legislation enacted by December 15, 2023, that list names 35 states, including California, Georgia, Illinois, Massachusetts, New Jersey, North Carolina, Ohio and Virginia. New York has its own PTET too. Since the list stops in 2023, check your own state's revenue site before you plan around it.

Rules differ by state

Two examples of how much the details vary.

California. Qualified entities are those taxed as a partnership or S corp. Publicly traded partnerships and entities in a combined reporting group are out. The election goes on a timely filed original return, never an amended one. A first payment is due June 15 of the tax year: $1,000 or 50% of the prior year's PTE tax, whichever is greater. For 2026 to 2030, a missed June 15 payment no longer kills the election, but owners lose 12.5% of their credit on the unpaid share. The program runs through tax years beginning before January 1, 2031.

New York. An authorized person opts in online between January 1 and March 15 each year. The election can't be undone after the first estimated payment is due. Estimated payments are due March 15, June 15, September 15 and December 15. Owners claim the credit on Form IT-653.

Who can't use it

A single-member LLC on Schedule C is not a partnership or S corp, so it has no entity-level income to tax. New York says plainly that single-member LLCs and sole proprietors are not eligible, unless the LLC is treated as an S corp. An S corp election is the usual way in. The S corp savings calculator and the business structure switch calculator show whether that move pays for itself.

PTET also interacts with the QBI deduction, since it lowers the K-1 income that QBI is figured on. And it doesn't change your reasonable salary. Wages are set first, and the entity tax comes out of what's left. Ask your preparer to run the numbers both ways before the state's election deadline.