Pass-Through Entity Tax (PTET) Election
A state-level tax elected at the entity level to allow pass-through owners to circumvent the federal SALT deduction cap.
Detailed Explanation
Roughly 36 states offer a PTET election. The entity pays the state income tax that would otherwise be paid by the owners and deducts it federally as a business expense, reducing federal taxable income. Owners then receive a credit on their state return for their share of PTET paid. Election timing, filing mechanics, and credit treatment vary significantly by state. The PTET election is one of the most impactful planning opportunities for owners of profitable pass-through businesses.
Key Points
- A state-level entity tax used to work around the federal $10,000 (now raised under OBBBA) SALT deduction cap.
- The pass-through entity pays state income tax and deducts it federally as a business expense.
- Owners receive a state tax credit (or income exclusion) for their share of the PTET paid.
- Roughly 36 states offer a PTET; election timing, mechanics, and credit treatment vary widely by state.
- Blessed by IRS Notice 2020-75, which confirmed the entity-level deduction is not subject to the SALT cap.
Practical Example
An S-corp owner in a high-tax state has $500,000 of pass-through income and would owe $45,000 of state tax personally, almost none of it deductible above the SALT cap. By electing PTET, the S-corp pays the $45,000 and deducts it federally, saving roughly $16,650 at a 37% federal rate, while the owner claims a state credit for the same $45,000.
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Learn about Tax Planning & StrategyRelated Terms
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
Partnership
A business entity owned by two or more persons who share in profits and losses, taxed as a pass-through with each partner reporting their share on their individual return.
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