The Pass-Through Entity Tax (PTET)
"The $10K SALT cap was a knife to the throat of every successful S-corp owner in NY, NJ, CA, and MA. 36 states quietly handed us the workaround — and the IRS signed off on it."
The 60-second pitch
In 2017, the Tax Cuts and Jobs Act capped the State And Local Tax (SALT) deduction at $10,000 per year per return. For an S-corp owner in New Jersey making $500K, that means $43,750 of state income tax was suddenly non-deductible at the federal level. The Tax Foundation estimated it cost high earners in NY/NJ/CA/CT/MA an extra $8K–$30K per year in federal tax.
Then states fought back. Starting with Connecticut in 2018, state legislatures passed laws letting pass-through entities (S-corps, LLCs taxed as partnerships) elect to pay state income tax at the entity level. The entity deducts the state tax as an ordinary business expense on its federal return — bypassing the $10K cap entirely. The owner then gets a refundable state credit or income exclusion on their personal return.
The IRS blessed this in Notice 2020-75, saying the federal deduction is allowed even though the underlying tax is on the owners' income. As of 2025, 36 states + NYC have enacted PTET regimes. Of the states with an income tax, only a handful (DE, ND, ME, etc.) still don't offer it.
It is the single most no-brainer election in modern tax. Most tax preparers running pass-through returns for owners in PTET states make this election by default. The fact that yours may not have is a $20K/yr unforced error.
Real-world example
The setup. Marcus owns a dental practice structured as a New Jersey S-corporation. After paying himself $180K in reasonable compensation, the S-corp passes through $500,000 of K-1 ordinary income to him. His marginal federal bracket: 37%. NJ marginal: 10.75%.
Without PTET (the old way). The S-corp pays no state-level tax. Marcus owes $53,750 in NJ state income tax personally on the $500K K-1. Federally, his SALT deduction is capped at $10,000 — so $43,750 of that state tax is wasted, non-deductible. He writes $53,750 to NJ and gets a $3,700 federal benefit ($10K × 37%).
With PTET (the new way). Marcus's accountant files Form PTE-100 electing PTET for tax year 2025. The S-corp itself pays the $53,750 in NJ tax directly. That payment is an ordinary deduction on the S-corp's 1120-S — it reduces K-1 income from $500K to $446,250. At Marcus's 37% federal bracket, the deduction saves him $19,887 in federal tax. He then gets a NJ refundable credit on his NJ-1040 for the $53,750 the entity already paid — so he owes zero additional NJ state tax personally.
The same money, but with a federal deduction. Marcus paid the same $53,750 to New Jersey. He still has the same $10K personal SALT room left for property tax. The PTET election didn't increase his state tax — it just recharacterized it from a non-deductible personal expense into a 100% deductible business expense.
The step-by-step checklist
- Confirm your state has a PTET regime. As of 2025: AL, AR, AZ, CA, CO, CT, GA, HI, ID, IL, IN, IA, KS, KY, LA, MD, MA, MI, MN, MS, MO, MT, NE, NJ, NM, NY, NC, OH, OK, OR, RI, SC, UT, VA, WV, WI, and NYC. Verify current-year status with your state revenue department — rules change yearly.
- Determine if the election is annual or one-time. Most states require an annual election; some (CA, NY) require it by a specific quarterly date — miss it and you lose the year. NJ allows late election in some cases.
- Check the owner-consent rule. Some states require unanimous consent from all shareholders/partners (NY, CT). Others let the entity elect unilaterally. If you have a passive minority owner, get sign-off in writing.
- File the PTET election form by the state deadline. NJ: Form PTE-100. NY: Form CT-2658 / IT-2658 system, election due by March 15. CA: Form 3893, with payment due June 15 of the elected year.
- Make the entity-level estimated payments on time. CA and NY require quarterly. The federal deduction is on a cash basis — the entity must actually pay the tax by year-end (or by 3/15 of the following year, depending on accounting method) to deduct it.
- Reduce K-1 income by the PTET paid. This shows up as a deduction on Form 1120-S Line 12 (Taxes & Licenses) or Form 1065 Line 14. Confirm your tax software is treating PTET as a deductible state tax, not an "other deduction."
- Claim the state credit on your personal return. Each state's mechanism differs. Most issue a refundable credit equal to the owner's share of PTET paid. Some (e.g., CA) issue a non-refundable credit. Don't double-pay state tax personally on income the entity already paid PTET on.
- Plan for cash flow. The entity is now writing the state-tax check, not you personally. If you usually pull distributions and pay state tax yourself, restructure to leave PTET cash in the entity.
- Decide whether non-resident owners benefit. A non-resident owner in a no-income-tax state (FL, TX, WA) may not want PTET in the entity's state because the credit doesn't help them. Some states let you elect at the owner level.
- For multi-state pass-throughs, consider PTET in each state with nexus. A construction company doing $2M in PA, $1M in NJ, and $500K in NY can elect PTET in all three — each apportioned share gets its own federal deduction.
- Sunset awareness. Many state PTET statutes are tied to the federal SALT cap. If Congress lifts the $10K cap, PTET becomes redundant. Most state regimes self-repeal in that case — but don't assume.
- Document the workflow. The election, the entity-level payment, the K-1 reduction, and the owner credit must all line up. Misalignment is the #1 source of state-tax notices on PTET elections.
IRS code & authority
- IRS Notice 2020-75 The blessing. IRS clarified that state-level pass-through entity taxes are deductible by the entity as a §164 trade-or-business expense, not subject to the $10K SALT cap on the owners' personal returns. This is the single document that legitimized the whole strategy.
- IRC §164(b)(6) The $10,000 SALT cap on individual returns (originally TCJA 2017 §11042). PTET avoids this section entirely because the tax is now paid by the entity, not the individual.
- IRC §162(a) Ordinary and necessary business expense — the section under which the entity deducts the state-level tax payment.
- Rev. Proc. 2020-50 Additional procedural guidance on the entity-level deduction; addresses timing and accrual.
- NJ Stat. 54A:12-1 et seq. NJ's "Pass-Through Business Alternative Income Tax" (BAIT) — one of the most generous PTET regimes; refundable credit, late election permitted.
- NY Tax Law §860–866 NY PTET — election due March 15; quarterly estimated payments required.
- CA Rev. & Tax Code §17052.10, §19900-19906 CA PTET — 9.3% flat rate; election due by 6/15 of taxable year with a $1K or 50% prepayment.
- Treas. Reg. §1.164-3 Defines deductible taxes; pass-through entity taxes paid at the entity level fall under §164(a) for the entity, exempt from individual cap.
Audit risk flags
- Missed state election deadline. Most states allow no late election; miss March 15 in NY and the year is gone. Defense: Calendar the date 60 days early. File even if you're not sure — most states let you revoke an elected PTET later, but you can't make a late one.
- Entity paid PTET but owners also paid state tax personally on the same income. Result: state will refund, but the double-count delays the federal deduction. Defense: Coordinate Q4 estimated payments — owners stop personal state-tax estimates once entity-level PTET kicks in.
- Cash-basis entity that didn't actually pay by year-end. You can't deduct an accrued PTET on a cash-basis 1120-S. Defense: Wire the entity-level payment by 12/31. Most states accept ACH same-day.
- Non-resident owner credit denied in home state. A FL resident with a NY S-corp may get the NY credit but no federal benefit (FL has no income tax) and may even owe more federal because the K-1 is reduced. Defense: Model each owner separately. Some PTET regimes allow per-owner elections.
- Improper K-1 classification. If PTET is reported on K-1 box 13 (credits) instead of being deducted at the entity level, the federal deduction is lost. Defense: Confirm tax software treats PTET as an above-the-line entity-level deduction, not a credit pass-through.
- State revokes PTET retroactively. Most state PTET statutes are SALT-cap-contingent. If the federal cap is repealed mid-year, some states automatically un-do their PTET. Defense: Watch federal SALT legislation and have a Q4 plan.
- Resident-state credit limit. NY resident with a CT S-corp paying CT PTET — NY only credits PTET up to the NY tax that would have been owed. Defense: Model the apportionment; sometimes splitting elections across states matters.
When NOT to do this
- You're a sole proprietor (Schedule C). PTET requires an entity — there's no "entity-level" tax for a sole prop. The fix is to incorporate, not elect PTET on a non-entity.
- You're a single-member LLC taxed as a disregarded entity. Same issue — for federal purposes the LLC doesn't exist. You'd need to elect S-corp or partnership taxation first (Form 2553 or 8832).
- All your income comes from a state with no income tax (TX, FL, WA, NV, SD, WY, TN, NH). Nothing to deduct. PTET is irrelevant.
- The $10K SALT cap is repealed. If Congress restores unlimited SALT, PTET becomes redundant. Don't lock into multi-year contracts that depend on PTET surviving.
- You have a passive minority owner who hates entity-level taxation. They may rationally object — their credit may not perfectly offset their share of the entity-level payment. PTET creates timing differences in their personal return.
- The state's PTET rate is higher than the owner's marginal state rate. A small-shareholder owner in a low individual bracket may overpay state tax via PTET. Check the math at owner level.
- Trusts and tax-exempt owners. Many state PTET regimes don't permit certain trust or non-resident-alien owners to participate. Their share would be excluded — adds complexity.
See if PTET fits your S-corp
PilePilot's Books agent maps your state's PTET rate against your K-1 income and shows the exact federal deduction available. It flags missed elections, missing entity-level payments, and double-paid personal state estimates — the three errors that turn a $20K savings into a $0 savings.
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Disclaimer. This page is educational and not tax advice. Each state's PTET regime has its own election deadline, rate, credit mechanism, and owner-eligibility rules — and most are updated annually. Before electing PTET, verify current-year rules with your state revenue department and your tax professional. All dollar examples are illustrative; your actual savings depend on your marginal federal rate, state, and entity structure.