If you own a business with partners or hold shares in an S corporation, you have probably felt the sting of the SALT cap. Since 2018, the federal write-off for state and local tax has been limited, and for owners in high-tax states, a big share of what you pay simply stops counting on your personal tax return.
It exists to fix exactly that. It is a legal way to move that bill off your individual return and onto the business, where the full amount stays deductible.
This guide explains what it is, how the election works, who can use it, and whether it still pays off after the 2025 changes to the SALT cap.
The pass-through entity tax, usually shortened to PTET, is an elective tax that a partnership or S corporation can choose to pay at the entity level on its business income. Most states call their version a PTE tax or a state pass-through entity levy, and the idea is the same everywhere. In plain terms, it is a tax on pass-through entities that owners can elect to pay through the business.
Normally a pass-through business does not pay income tax itself. The profit passes through to the owners, who report it and pay tax on their own returns. The election flips that for state purposes. When the entity opts in, the business pays the tax on that income, so it is taxed at the entity level instead of landing on each personal return. This is a tax that partnerships and S corporations elect into, which means paying income taxes at the entity rather than only on individual returns.
Owners are not charged twice. Each one receives a tax credit on their state return for the amount the business covered on their behalf, so the bill is settled once. What changes is who writes the check, and that small shift is where the federal benefit comes from.
To see why this matters, go back to 2017. The Tax Cuts and Jobs Act capped the federal deduction for state and local tax at $10,000 a year for individuals who itemize. For owners of pass-through entities in places like California or New York, that limit wiped out a large part of their write-off overnight.
Here is the useful quirk. The SALT cap applies to individuals, not to businesses. A company can still deduct what it pays as an ordinary expense, with no ceiling. So when the entity covers that income at the state level, the payment becomes a full tax deduction for federal income tax purposes, lowering the taxable income that flows through to the owners.
The IRS confirmed this approach in 2020, and states began moving fast afterward. More than 30 states have enacted their own versions, which is why many states have enacted entity-level tax rules as a direct answer to the cap. It is the reason people call this the SALT cap workaround. The write-off that was stuck on your personal return moves to the business, where the federal limit cannot reach it.
The mechanics follow a consistent pattern, even though every state writes its own rules.
First, the entity must make the election. Because the option resets each tax year, you opt in for that taxable year by a set due date. Miss the deadline and you lose it for that year.
Next, the business works out what it owes. It applies the state's income tax rate to the owners' share of net income to find the amount of tax due, then sends the money, often through estimated tax payments spread across the year rather than one lump sum. In many states those estimated payments are due on fixed dates, and skipping them can shrink or void the benefit. The PTE tax rate is sometimes the top individual rate, so the entity's figure does not always match what a given owner would have paid alone.
Then the credit flows through. When each owner files a personal income tax return, they claim a credit for their share already covered, which lowers that owner's tax to reflect it. The entity return and the individual tax returns have to line up, so once the return is filed, the amounts are allocated correctly to everyone. In short, the entity has to file the return and pay the tax, and the owners settle up through the credit.
Done right, the owners pay the same amount they always would have, but the federal write-off now sits at the business level where it counts.
The workaround is built for pass-through entities, so your structure decides whether you can use it.
Partnerships and S corporations are the core group, along with limited liability companies taxed as either one. If your income already flows through to owners who report it personally, you are likely eligible, and a partnership or an S corp is the typical electing business entity. Each owner, whether a partner or an S corporation shareholder, picks up the benefit through the credit.
A few structures are left out. A single-member LLC that is disregarded is treated as a sole proprietorship, not a separate entity, so it usually cannot elect. C corporations do not need the workaround at all, since they pay corporate income tax and already write off what they owe the state directly. And some states exclude a publicly traded partnership, since that kind of ownership does not fit the credit model.
One more point. In most states the choice is all or nothing. Every owner goes in together, so a business with many entity owners needs everyone aligned, because the decision binds the group, and the entity may help some owners more than others. The tax treatment can differ from one owner to the next, and an owner in a no-income-tax state may have little income subject to tax to benefit from.
This is the live question right now, because the SALT cap just changed.
The 2025 tax law, known as the One Big Beautiful Bill Act, raised the SALT cap from $10,000 to $40,000 starting in 2025, with small annual increases through 2029. For some owners, a higher cap means more of their state bill is deductible on the personal return again, which softens the original problem.
But the workaround is far from dead. The higher cap phases down once income passes $500,000, sliding back toward $10,000 for a high earner, the kind of taxpayer who tends to carry the largest state bills. For them, the entity-level write-off is still the only way to deduct the full amount, and the federal tax savings stay real. Earlier proposals to strip the benefit from service businesses did not survive into the final law, so it came through intact, and several states have made updates to keep their programs running.
The PTET election also brings tax benefits and other tax breaks beyond the cap. Because it lowers the income passing through, it can reduce self-employment tax and pull down adjusted gross income, which helps with breaks that phase out at higher income. So even where the bigger cap helps, the election often still wins, and the best answer depends on how federal tax policy keeps evolving.
For pass-through entities, the strategy is powerful, but not automatic, and a few details decide whether it helps.
Watch the entity rate. In states that impose a flat top rate on this income, the entity tax rate is higher than what a lower-bracket owner would have paid alone. The federal savings usually still outweigh it, but run both the federal and state tax math first.
Mind the multistate angle. If owners live in different states, their home states may or may not give credits for taxes paid elsewhere. A state that does not honor taxes paid to other states can leave an owner double-taxed, so that piece deserves a close look, along with how the election interacts with other tax types on the return.
Rules shift from state to state. Election deadlines, payment timing, and credit mechanics all vary, so last year's approach may not match this year's. The safest move is to model the choice owner by owner before committing, since one decision binds the whole group.
This is one of those areas where the payoff is real but the execution is fussy. Every state has its own election, its own deadlines, and its own credit math, and a single missed estimated payment can undo the benefit. For a CPA firm running this across many partnership and S corporation clients, that is a lot to track.
This is where Madras Accountancy supports U.S. CPA firms. We handle the tax work behind the election, from the owner-by-owner math and deadlines to preparing the entity and individual returns, all under your firm's review and your firm's name. If this season is stretching your team thin, it is worth a conversation.
What is a pass-through entity tax? It is an optional tax, or PTET, that a partnership or S corp pays it directly on its income. The owners then get a tax credit for their share, so the business covers the state bill instead of each owner paying it personally.
How does the election get around the SALT cap? The SALT cap limits the state and local deduction for individuals, but not for businesses. When the entity pays state income tax through the election, it writes the payment off as a business expense for federal income tax purposes, which the $10,000 cap on personal returns does not touch.
Who can make a PTET election? Pass-through entities, mainly partnerships and S corporations, plus LLCs taxed as either. A single-member LLC treated as a sole proprietorship, C corporations, and in some states a publicly listed partnership cannot. In most states all owners must agree, since one election covers the whole entity.
Do owners get taxed twice? No. The entity handles the payment, and each owner claims a tax credit on a personal return for their share. The state income tax is settled once. The election just changes who pays it and where the federal write-off lands.
How many states allow this? More than 30 states with an income tax have adopted a version since the SALT cap took effect, and the count keeps growing. States began adopting them after 2017, and each one sets its own rate, deadline, and credit rules, so the details change from state to state.
Is PTET still worth it after the 2025 SALT cap increase? Often yes. The 2025 law raised the cap to $40,000 but phases it down for higher earners, who usually have the biggest state bills. For them, the business-level write-off still beats the personal cap, and the election can also lower self-employment costs and adjusted gross income.
When is the election due? It depends on the state. Most require an annual election by a set due date, and many also want estimated tax payments during the year. Because those estimated payments are due on fixed dates, missing one can reduce or cancel the benefit, so timing matters as much as the decision.
What does the election actually save? It restores a federal write-off for the tax paid to the state that the SALT cap would otherwise limit. On top of that, lowering pass-through income can trim self-employment tax and shrink adjusted gross income, which may cut your federal tax liabilities and unlock other tax benefits that phase out at higher income.
The workaround is one of the clearest wins in state planning right now. It takes a write-off the SALT cap took away and puts it back where the federal limit cannot reach. The catch is in the details, the deadlines, the owner-level math, and the rules that move from state to state, which is exactly where a careful hand pays off. If your firm wants this handled cleanly, Madras Accountancy is glad to help.
This article is general information for business owners and finance teams, not formal tax advice. PTET rules vary by state and change often, so confirm the treatment for your situation with a qualified tax professional.
Single-entry vs double-entry bookkeeping made simple: how each accounting system works, the key differences, and which one your small business needs.
%2075-100%20(12).png)
CPA vs EA (enrolled agent) vs tax attorney: how each tax professional differs, who can represent you to the IRS, and which fits your tax needs.
%2075-100%20(9).png)
Learn how tax professionals should respond to a data breach, report theft to the IRS and states, notify clients, meet FTC rules, and prevent future attacks.
