The OBBBA raised the SALT deduction cap to $40,000 — but that headline misses who still needs a workaround. Owners above $500,000 in MAGI face a phaseout that floors the SALT cap back to $10,000. And even with the full $40,000, high earners in California, New York, or New Jersey routinely pay two to four times that amount in state income taxes. The pass-through entity tax (PTET) bypasses the SALT cap entirely by moving the deduction from Schedule A to the business's income statement.
Why PTET Still Matters With a $40,000 SALT Cap
The OBBBA's new cap helps many taxpayers — but two groups still face a meaningful gap:
High earners in the SALT phaseout zone. If MAGI exceeds $500,000, the $40,000 cap shrinks by $300 for every $1,000 of excess income. At $600,000 MAGI, it floors back to $10,000 — identical to the TCJA. PTET sidesteps the phaseout entirely because the deduction never appears on Schedule A.
Business owners with large state tax bills. An S-corp owner with $1.5M of net income in California owes over $130,000 in state income tax. Even claiming the full $40,000 SALT deduction, $90,000+ remains undeductible federally — unless the entity elects PTET.
PTET also benefits owners subject to the Alternative Minimum Tax. Since the deduction reduces business income rather than appearing on Schedule A, it survives the AMT calculation — where individual SALT deductions are added back entirely.
How PTET Works: The Mechanics
PTET Election: Four Steps
How It WorksStep 1 — Election. The pass-through entity (S-corp, partnership, or LLC taxed as a partnership) makes an annual election with the applicable state. Deadlines vary significantly by state and are discussed below.
Step 2 — Entity pays state tax. The entity calculates and remits state income tax on its income at the entity level. This payment is a deductible business expense under IRC §164(a)(3), reducing the entity's net income for federal purposes.
Step 3 — Reduced pass-through to owners. Each owner's K-1 reflects the lower net income after the PTET deduction. Less income flows to their Form 1040 — reducing federal taxable income before AGI is calculated, not as a below-the-line itemized deduction.
Step 4 — State credit prevents double taxation. Each owner's individual state return includes a credit equal to their share of the PTET paid. The state tax burden is satisfied at the entity level; the credit ensures owners aren't taxed on the same income twice.
The result: the owner effectively deducts the full state income tax bill, with no exposure to the SALT cap.
The Math: What PTET Saves
Consider an S-corp owner in California with $1,000,000 in business income and $700,000 MAGI. At that MAGI level, the SALT cap has phased out entirely to the $10,000 floor.
The savings scale with state tax rates and the distance above the $500,000 phaseout threshold. In high-tax states, even owners within the full $40,000 SALT cap benefit if their state tax bill exceeds that amount.
Who Benefits Most
PTET delivers the most impact when:
- MAGI exceeds $500,000 — the phaseout reduces or eliminates the individual SALT deduction
- State income taxes exceed $40,000 — the cap leaves substantial taxes undeductible even at full value
- The entity operates in a state with a PTET program — currently 30+ states plus New York City
- Owners are subject to AMT — PTET avoids the addback that wipes out Schedule A SALT deductions in the AMT calculation
- All owners benefit from the election — the PTET election typically binds all partners or shareholders, so agreement among owners is necessary
PTET isn't universally advantageous. Owners near the QBI phaseout threshold, those with significant losses, or those in states with unfavorable credit structures should model the specific impact before electing.
State Availability and Key Deadlines
Over 30 states have enacted PTET as of 2026, including California, New York, New Jersey, Illinois, Virginia, Georgia, Maryland, and Colorado. Minnesota's PTET expired for tax years beginning after December 31, 2025.
Deadlines vary substantially and missing them means waiting a full year:
- New York — March 15: Election must be made by March 15 of the tax year and is irrevocable after the first estimated payment date. For calendar-year 2026, this deadline has already passed.
- California — June 15 prepayment: A prepayment equal to the greater of 50% of the prior-year PTE tax or $1,000 is due by June 15. Missing it triggers a 12.5% reduction to the allowable credit on any shortfall. The program has been extended through 2030.
- New Jersey (BAIT) — Annual return: The election is made on the PTE-100 return, providing more scheduling flexibility than New York.
- Michigan — September 30: Election deadline was extended to the last day of the ninth month following the tax year-end, giving owners significantly more time to analyze before committing.
- Illinois — Permanent: The PTET was made permanent in December 2025, eliminating annual uncertainty about the program's continuation.
Tradeoffs to Model Before Electing
Two interactions can partially offset PTET savings and should be analyzed before committing:
QBI deduction reduction. The PTET payment reduces net business income flowing to the owner's K-1. Because the Section 199A QBI deduction is calculated on qualified business income, a lower QBI means a smaller 20% deduction. For owners near the QBI threshold or with wages close to the W-2 wage limitation, the PTET-driven QBI reduction can meaningfully diminish the net benefit.
Retirement plan contribution base. For partnership and LLC owners, the distributive share reduction from PTET can reduce the self-employment income base used to calculate SEP-IRA or solo 401(k) contributions. S-corp owners are generally unaffected (retirement contributions are tied to W-2 salary, not pass-through income), but this matters in partnership and multi-member LLC structures.
Legislative Status
Earlier drafts of the legislation that became the OBBBA would have significantly curtailed PTET workarounds. The final version expressly preserved PTET for pass-through entities operating predominantly in Section 199A qualified trades or businesses. Entities with complex income mixes — particularly those with substantial investment or rental income that falls outside Section 199A — should confirm eligibility under the current rules.
PTET elections require coordination across federal and state filings, entity governance, and owner-level modeling. Deadlines are real and non-negotiable. Contact TS CPA to determine whether a PTET election makes sense for your entity and to run the numbers before your state's window closes.