What is a pass-through entity tax (PTET) election?

A PTET election allows a partnership or S-corporation to pay state income taxes at the entity level rather than passing those taxes through to individual owners. This lets the entity take a federal deduction for the state taxes paid — effectively bypassing the $10,000 SALT deduction cap that applies to individuals. The individual owners then receive a credit on their state return for their share of the entity-level taxes paid.

Which states offer PTET elections?

As of 2026, more than 30 states have enacted PTET legislation, including California, New York, New Jersey, Texas, Illinois, Colorado, Georgia, and Virginia. The mechanics differ significantly by state — some are mandatory, some are elective, and the deadlines and credit mechanisms vary. Connecticut's PTET is mandatory; most others require an annual election. Your CPA should review the rules in every state where your entity operates.

How much can a PTET election save in federal taxes?

For owners subject to the highest federal income tax rate (37%), a successful PTET election on state income taxes of $50,000 can produce federal tax savings of approximately $18,500 — roughly what was lost by the SALT cap. The exact savings depend on the state tax rate, the entity's income, the owner's federal bracket, and whether the state credit mechanism fully offsets the entity-level taxes paid. Your CPA should model this before electing.

Does a PTET election apply to S-corporations?

Yes, most states that have enacted PTET legislation allow both partnerships and S-corporations to make the election. The IRS has explicitly stated (in Notice 2020-75) that PTET payments by a partnership or S-corp are deductible at the entity level as ordinary business expenses, confirming the federal tax benefit for both entity types.

What is the deadline to make a PTET election?

Deadlines vary by state and tax year. New York's deadline for calendar-year entities is March 15 of the current year. California requires an election by June 15 of the tax year. Many states allow elections with the entity's tax return filing. Missing the election deadline means forfeiting the tax benefit for that year — a key reason PTET elections should be part of your CPA's mid-year tax planning calendar, not an afterthought.

Pass-Through Entity Tax (PTET) Elections: What S-Corp and Partnership Owners Need to Know in 2026

July 2, 2026 · Guide · 5 min read

Pass-through entity tax elections let S-corporations and partnerships pay state income tax at the entity level, generating a federal deduction that bypasses the $10,000 SALT cap imposed on individuals since 2018. For business owners in high-tax states like California, New York, New Jersey, and Illinois, a properly structured PTET election can recover $10,000–$30,000+ in annual federal taxes depending on the entity's income and state tax burden. The IRS confirmed the strategy's legitimacy in Notice 2020-75 — but the mechanics are state-specific and the deadlines are unforgiving.

The Problem PTET Solves

The Tax Cuts and Jobs Act of 2017 capped the state and local tax (SALT) deduction at $10,000 for individuals filing federal returns. For partners and S-corp shareholders in states with 9–13% income tax rates, this cap eliminated a deduction that previously reduced federal taxable income by $50,000, $100,000, or more annually. The economic consequence: owners in high-tax states effectively pay federal taxes on income already taxed by their state.

PTET elections solve this by moving the state tax payment from the owner (subject to the SALT cap) to the entity (not subject to the SALT cap). The entity deducts the state tax as a business expense under IRC Section 164, reducing the income passed through to owners. Owners then receive a state credit equal to their allocable share of the entity-level taxes paid, preventing double taxation at the state level.

How PTET Elections Work in Practice

Step 1: Entity Makes the Election

The partnership or S-corp files an election with the state by the applicable deadline. Some states require unanimous owner consent; others allow the managing partner or authorized officer to elect unilaterally.

Step 2: Entity Pays State Income Tax on Behalf of Owners

The entity calculates the PTET tax base — typically the owners' allocable income attributable to that state — and pays the tax directly to the state. California uses a 9.3% rate; other states use their own rates or graduated structures.

Step 3: Entity Deducts the Payment at the Federal Level

The PTET payment reduces the entity's ordinary income passed through to owners on their Schedule K-1. This reduces each owner's federal taxable income by their allocable share of the PTET payment — producing the equivalent of an uncapped state tax deduction.

Step 4: Owner Claims State Credit

On their state individual return, each owner claims a credit equal to their allocable share of the entity-level tax paid. Without this credit, the owner would pay state taxes twice. The credit mechanism is how states make PTET elections tax-neutral at the state level while producing federal savings.

Key State-by-State Variations

California

California's PTET election applies to qualifying S-corps and partnerships with California-source income at a 9.3% rate. The election must be made by June 15 of the tax year, with an estimated payment due by the same date. The state credit is nonrefundable and carries forward 5 years if unused. For California-heavy businesses with owners in the 13.3% marginal bracket, PTET savings can be substantial.

New York

New York's PTET covers both partnerships and S-corps, with an election deadline of March 15 of the taxable year (calendar-year entities). Required estimated payments are due quarterly. New York's PTET rate is graduated: 6.85% for income up to $2M, rising to 10.9% for income over $25M. New York allows nonresident owners to claim the credit on their nonresident return — important for entities with out-of-state owners who still have New York-source income.

New Jersey

New Jersey's Business Alternative Income Tax (BAIT) applies to partnerships and S-corps at graduated rates from 5.675% to 10.9%. New Jersey allows retroactive elections — owners can elect and pay the prior year's BAIT with the entity's tax return filing, reducing planning risk significantly compared to other states.

Illinois

Illinois's Pass-Through Entity Tax uses a flat 4.95% rate. Illinois has no graduated individual rate, so PTET savings are driven entirely by the SALT cap workaround rather than rate differences. Estimated payments are required quarterly.

Who Benefits Most

PTET elections are most valuable when owners are in the 32–37% federal bracket (the deduction is worth more at higher rates), the entity has significant income in a high-tax state, the owners' state tax liability exceeds $10,000 annually, and all or most owners consent to the election. For C-corporations, PTET elections don't apply — C-corps already deduct state income taxes as business expenses without the SALT cap constraint.

Complications to Review with Your CPA

Nonresident Owner Complexity

When an entity has owners in multiple states, PTET elections can create nonresident credit calculation challenges. Some states' PTET credits are only available to residents; others allow nonresident credit claims. Before electing, your CPA should map out the tax impact for each owner's state filing separately.

Cash Flow Timing

The entity makes the PTET payment directly — but owners should reduce or eliminate their individual state estimated tax payments for the income covered by the election to avoid overpayment. This timing coordination requires explicit planning between the entity and each owner.

Basis Adjustments

In partnerships, PTET payments are treated as tax distributions for partner basis calculations. In S-corps, the deduction reduces ordinary income (increasing shareholder basis) but the deemed distribution reduces basis as well. The net basis effect depends on timing and allocation — a detail worth confirming with your CPA to avoid unexpected limitation of losses.

How a CPA Models the Benefit

A qualified CPA will run a projection comparing after-tax income for owners in two scenarios: with the PTET election and without. The model accounts for the federal income reduction from the entity-level deduction, state credits claimed by each owner, net cash flow impact from the entity's payment obligation, and any multistate complications from nonresident owners. If your entity hasn't reviewed its PTET eligibility for 2026, schedule that conversation now — most election deadlines fall mid-year.

See our guide on LLC vs. S-Corp vs. C-Corp tax implications for the broader entity tax strategy context, and our breakdown of S-corp tax filing deadlines and extensions so you don't miss required estimated payments. Browse CPAs near you or search by city to find tax advisors experienced in pass-through entity structuring.

Frequently Asked Questions

What is a pass-through entity tax (PTET) election?: A PTET election allows a partnership or S-corporation to pay state income taxes at the entity level rather than passing those taxes through to individual owners. This lets the entity take a federal deduction for the state taxes paid — effectively bypassing the $10,000 SALT deduction cap that applies to individuals. The individual owners then receive a credit on their state return for their share of the entity-level taxes paid.
Which states offer PTET elections?: As of 2026, more than 30 states have enacted PTET legislation, including California, New York, New Jersey, Texas, Illinois, Colorado, Georgia, and Virginia. The mechanics differ significantly by state — some are mandatory, some are elective, and the deadlines and credit mechanisms vary. Connecticut's PTET is mandatory; most others require an annual election. Your CPA should review the rules in every state where your entity operates.
How much can a PTET election save in federal taxes?: For owners subject to the highest federal income tax rate (37%), a successful PTET election on state income taxes of $50,000 can produce federal tax savings of approximately $18,500 — roughly what was lost by the SALT cap. The exact savings depend on the state tax rate, the entity's income, the owner's federal bracket, and whether the state credit mechanism fully offsets the entity-level taxes paid. Your CPA should model this before electing.
Does a PTET election apply to S-corporations?: Yes, most states that have enacted PTET legislation allow both partnerships and S-corporations to make the election. The IRS has explicitly stated (in Notice 2020-75) that PTET payments by a partnership or S-corp are deductible at the entity level as ordinary business expenses, confirming the federal tax benefit for both entity types.
What is the deadline to make a PTET election?: Deadlines vary by state and tax year. New York's deadline for calendar-year entities is March 15 of the current year. California requires an election by June 15 of the tax year. Many states allow elections with the entity's tax return filing. Missing the election deadline means forfeiting the tax benefit for that year — a key reason PTET elections should be part of your CPA's mid-year tax planning calendar, not an afterthought.