Tax Tip 6: Pass-Through Entity Tax (PTET) as a Tax Strategy

1  What Is PTET?

Pass‑Through Entity Tax (PTET) is an elective state‑level tax paid directly by a pass‑through entity—think LLCs, S corporations, or partnerships. Because the business pays the state income tax (instead of the owners), the full amount becomes a deductible business expense on the federal return. That neatly sidesteps the $10,000 cap on state‑and‑local‑tax (SALT) deductions that still frustrates owners in high‑tax states.

2  Why PTET Still Matters in 2025

• SALT cap pressure remains. Although the House has proposed raising the cap to $40,000 for some taxpayers, most high‑income owners will still hit the $10,000 limit through at least 2025.
• 36 states now offer a PTET election. The Senate’s June 2025 bill confirms that thirty‑six states have already adopted some form of PTET—and more are considering it. (taxfoundation.org)
• Federal deductibility = real cash savings. Every dollar of state tax paid at the entity level reduces federal taxable income—often saving 30‑40 cents per dollar for owners in the highest brackets.

3  How the Election Works

1. Opt in. File your state’s PTET election form—usually online—by the stated deadline (often March 15 or the first estimated‑tax payment).
2. Pay entity‑level tax. Your business pays the state income tax during the year and books it as an ordinary expense.
3. Claim owner credit. Each owner receives a credit on their personal state return for their share of the tax already paid, preventing double taxation.

4  California Example

Result: Owners convert a $50,000 non‑deductible personal tax into a fully deductible business expense—often trimming $10,000 + from their federal tax bill.

More Info: California PTET Guide

5  Where PTET Is Available

Besides early adopters like Connecticut and New Jersey, high‑population states such as California, New York, Illinois, and Colorado all offer PTET elections. Only a handful of income‑tax states—including Delaware, Maine, North Dakota, Pennsylvania, and Vermont—remain on the sidelines.

6  Four Questions to Ask Before Electing PTET

1. Will every owner benefit? Lower‑bracket owners or those below the SALT cap may see little advantage.
2. What is the state’s PTET rate? Some states apply a flat rate equal to their top individual rate; others offer tiers. Crunch the numbers first.
3. How is estimated tax handled? Missing an installment can forfeit the election for the year.
4. Do we operate in multiple states? Multi‑state passthroughs must track, allocate, and claim credits carefully.

7  Key Takeaways

• PTET converts personal SALT into a fully deductible business expense.
• The election is annual—revisit the choice every year before making estimated tax payments.
• Multi‑state passthroughs must track allocation & credits carefully to avoid double taxation.
• Cash‑flow impact: entity‑level payments may front‑load taxes, so budget accordingly.
• Owners under the SALT cap or in lower brackets might not benefit—run the numbers first.
• Legislation watch: proposals in Congress (e.g., the June 2025 Senate bill) could expand or curtail PTET after 2025.
• Coordinate early with your CPA so K‑1s, books, and estimated vouchers reflect the election accurately.