A pass-through entity tax (PTET) election lets your S corporation or partnership pay state income tax at the business level instead of you paying it personally. The business deducts the full payment on its federal return, which sidesteps your individual SALT cap entirely. You then claim a credit on your state personal return. Most states make the credit dollar-for-dollar, but the mechanics vary by state, so confirm how yours works.

How does a PTET election actually work?

Four steps, in order:

1. Your entity elects in. Each year, your S corp or partnership makes the PTET election with the state, usually on its timely filed original return. The election is typically annual and irrevocable, so you model it before you commit. (The annual-and-irrevocable pattern is California's; other states set their own mechanics.)

2. The entity pays your state tax for you. Instead of you paying state income tax on your personal return, the business pays tax on your share of its income directly to the state.

3. The business deducts the payment federally. Because the tax is paid and deducted at the entity level as an ordinary business expense, it never appears on your personal return, which means the SALT cap never touches it. There is no dollar limit.

4. You claim the credit personally. Your state gives you a credit for the tax the entity paid on your behalf, which offsets the personal state tax liability on that same income. Most states make this credit dollar-for-dollar, but confirm your state's rules. You are not taxed twice.

The federal framework for this structure is IRS Notice 2020-75, the IRS's operative guidance. The final law did not enact the House-passed PTET restrictions, so it remains in effect.

Who qualifies for the PTET election?

The election is for owners of pass-through entities: S corporations, partnerships, and LLCs taxed as partnerships or S corporations. It does not help everyone:

• Sole proprietors cannot elect. There is no entity to pay the tax.

• C corporations do not need it. They already deduct state taxes as a business expense.

• Pure W-2 employees cannot elect. You need pass-through income in a PTET state.

Some states also restrict which owners count. An entity with ineligible owners may have to carve their shares out of the election, so check your state's rules before assuming the whole business qualifies.

Which states offer a PTET election?

As of January 8, 2026, 36 states and one locality (New York City) have enacted a PTET regime, according to the AICPA's state map. That covers every major high-tax state: California, New York, New Jersey, Illinois, Massachusetts, and most of the rest.

A few cautions before you celebrate. Some states' programs have sunset dates tied to the federal SALT cap, a few are elective versus mandatory, and rates and mechanics differ state by state. Confirm your state still offers the election for the tax year you are planning, and read its payment deadlines. The deadlines are where elections are won or lost.

California's PTET: the details that matter

California is our home turf and the highest-stakes PTET state, so here is the full picture:

• Extended through 2030. New legislation (SB 132, signed June 2025) extended the election for tax years 2026 through 2030. It was previously set to expire after 2025. (CA Franchise Tax Board)

• The rate is 9.3%. The entity pays 9.3% on the qualifying income allocated to consenting owners. (CA Franchise Tax Board)

• Two payments. The first is due June 15 of the tax year and must be the greater of $1,000 or 50% of the prior year's PTET. The balance is due by the original return due date, without regard to extensions. (CA Franchise Tax Board)

• New flexibility starting 2026. Under the old rules, missing the June 15 prepayment in the right amount killed the entire election. Starting with 2026 tax years, the election stays valid even if the June 15 payment is missed or short, but each owner's credit is reduced by 12.5% of the owner's pro rata share of the unpaid amount that was due on June 15. (CA Franchise Tax Board) The old harsh rule still applies to 2025, so do not assume past mistakes are forgiven.

• Annual and irrevocable. You elect each year on the timely filed original return (it cannot be made on an amended return). Once made, the election is irrevocable and binds all owners, consenting and nonconsenting.

• Credit against net tax, with carryforward. The credit applies against your California net tax; if it exceeds the tax due, the unused amount carries forward up to five years. (CA Franchise Tax Board)

Here is a worked example. You own an S corp and $400,000 of California income flows through to you:

• PTET paid by the entity: 9.3% x $400,000 = $37,200

• Federal business deduction: $37,200 (at a 35% marginal rate, roughly $13,020 of federal tax saved; illustrative)

• Your California personal credit: $37,200 against your state tax bill

Without the election, that $37,200 of state tax would land on your personal return inside the SALT cap, competing with your property tax for limited room. With it, the full amount is deducted with no cap at all.

When does PTET not make sense?

The election is powerful, not automatic. Skip it or think twice when:

• Your total SALT sits comfortably under the cap. With the 2026 cap at $40,400, an owner whose combined state and property taxes fall well below that gets little from the election beyond extra compliance cost.

• Cash flow cannot handle the prepayments. California wants significant money by June 15. If the business cannot fund it, the election creates a crunch.

• Your state does not offer it, or your pass-through income is not sourced there.

• You have significant qualified business income. PTET payments reduce your federal business income, which shrinks qualified business income and therefore your 20% QBI deduction. Model the trade-off: the SALT savings should exceed the QBI deduction you give up.

• You have not modeled it. Because the election is irrevocable for the year, run the numbers with your actual income, marginal rate, and state rules before electing. The wrong election year is a year you cannot undo.

What is the biggest PTET timing trap?

The payment deadlines. The deduction belongs to the year the entity actually pays, and most states require payment well before the return is filed. California's June 15 prepayment is the classic trap: owners who discover PTET in March of the following year learn the election year has already closed. Put the deadlines on the calendar a full year ahead, not at tax time.

Does the higher SALT cap make PTET obsolete?

No, for three reasons. First, the $40,400 cap phases out above $505,000 of MAGI, shrinking back toward $10,000 for the highest earners, while PTET has no phaseout and no cap. Second, property tax eats cap room fast in expensive markets, leaving less space for income tax. Third, the enhanced cap expires after 2029. In 2030 the personal cap drops back to $10,000 and PTET becomes even more valuable. For high earners in high-tax states, PTET is a multi-year strategy, not a stopgap.

Pending review by Brian Thomas, EA. Updated September 25, 2026.

This article is free educational content, not tax advice for your specific situation. If you want a plan built around your actual numbers, that is what our paid tax planning engagements do.