Overview · 3 min read
Pass-through entity tax (PTET)
Individuals can deduct only a capped amount of state and local tax. Many states let an S corp or partnership pay state income tax at the entity level, where it is deductible as a business expense, and give owners a credit on their state return.
- Who it fits
- Owners of S corps and partnerships in states that offer an elective entity-level tax.
- Figures
- 2026 tax year
The key rule
For 2026, the individual state and local tax cap is $40,400, reduced by 30% of income over $505,000, down to a floor of $10,000. Higher earners are still capped, so the entity election can be worth a lot.
How it works
The business pays the state tax on its income and deducts it, which lowers the profit flowing to your federal return. You then claim a credit on your state return for the tax the business paid, so you are not taxed twice by the state.
4 steps
Check your state
Each state sets its own rules, rates, deadlines and payment schedules.
Model each owner
The benefit depends on each owner's income and state. We run the numbers before electing.
Make the election
Some states require the election during the year; others on a timely filed return.
Make the payments on time
Many states, including California, require a payment by June 15 for the full benefit.
Example
A high earner
Your S corp earns $600,000. Your personal SALT deduction is near the $10,000 floor. Electing PTET lets the S corp deduct roughly $55,000 of state tax, saving about $20,000 of federal tax.
Common mistakes
- Missing a required mid-year payment can reduce or eliminate the benefit.
- Electing without checking owners who live in other states, who may not get a matching credit.
- Forgetting that the entity payment lowers your federal income, which can affect other calculations like retirement contributions based on profit.
Key dates
- June 15 (California)
- First payment required to elect for the year.
- Original return due date
- Many states require the election on a timely filed return.
Questions we hear
Is it worth it below the SALT cap?
Usually less so. If your state and local taxes already fit within your cap, the extra deduction adds little. Higher earners, whose cap phases down to $10,000, benefit most.
Do sole proprietors qualify?
No. Only entities taxed as partnerships or S corps can elect.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.