The $40,000 SALT cap helps, but S-corp and LLC owners in high-tax states often owe two to four times that in state income taxes. The pass-through entity tax (PTET) bypasses the cap entirely by moving the deduction from your personal Schedule A to the business's income statement.
Why PTET Still Matters After the $40K Cap
If your MAGI exceeds $500,000: The SALT cap phases out to $10,000 by $600K MAGI. PTET sidesteps the phaseout entirely because the deduction never appears on Schedule A.
If your state taxes exceed $40,000: An S-corp owner with $1.5M of net income in California owes $130K+ in state taxes. Even the full $40K SALT deduction leaves $90K+ undeductible, unless the entity elects PTET.
If you're subject to AMT: PTET reduces business income rather than appearing on Schedule A, so it survives the AMT calculation where individual SALT deductions are added back entirely.
How It Works
Make the Election
The entity makes an annual election with the state. Deadlines vary significantly. New York's is March 15 (already passed for 2026), California requires a June 15 prepayment, and Michigan allows until September 30. Missing the deadline means waiting a full year.
Entity Pays State Tax
The entity calculates and remits state income tax at the entity level. This payment is a deductible business expense under IRC §164(a)(3), reducing net income for federal purposes. Each owner's K-1 reflects lower income after the PTET deduction.
Owners Get a State Credit
Each owner receives a credit on their individual state return equal to their share of PTET paid. This prevents double taxation: the state tax is satisfied at the entity level, and the credit zeros out the individual state liability on the same income.
Key State Deadlines for 2026
- New York, March 15 (irrevocable after first estimated payment)
- California, June 15 prepayment (50% of prior-year PTE tax or $1,000 minimum)
- New Jersey (BAIT): election on PTE-100 return (more flexible timing)
- Michigan, December 31 (election made on annual return by end of tax year)
- Illinois: permanent program as of December 2025
Tradeoffs to Model First
QBI deduction impact. PTET reduces K-1 income, which reduces your Section 199A QBI deduction (20% of qualified business income). For owners near the QBI threshold, this offset can be meaningful.
Retirement contribution base. For partnership/LLC owners, the reduced distributive share can shrink the self-employment income base for SEP-IRA or solo 401(k) contributions. S-corp owners are generally unaffected since retirement contributions tie to W-2 salary.
Who Benefits Most
PTET is most valuable when MAGI exceeds $500,000, state taxes exceed $40,000, the entity operates in a state with a PTET program, and owners are subject to AMT. It's less valuable for owners near QBI phaseout thresholds or those with significant losses.
PTET elections require coordination across federal/state filings and agreement among all owners. Deadlines are non-negotiable. Contact TS CPA to run the numbers before your state's window closes.