The Pass Through Entity Tax (PTET) is a state level tax that allows businesses such as S corporations and partnerships to pay state income tax at the entity level rather than passing the tax liability onto the individual owners. The primary advantage of this election is that the state tax paid by the entity is fully deductible on the federal tax return as a business expense, which lowers the owners' federal taxable income. Essentially, this is a "work around" to the cap on state and local taxes that can be deducted at the individual level.

Owners of entities that elect PTET receive a state level credit for the tax paid by the entity. This credit varies by state and offsets the owners' personal state income tax liability, preventing double taxation. By electing to pay tax at the entity level, owners can get around the personal SALT deduction cap. For 2026 that cap is $40,400 ($20,200 married filing separately), and it shrinks for high earners: above $505,000 of modified AGI it phases down by 30 cents per extra dollar of income until it hits $10,000. Most physician households earning above roughly $606,000 are back at a $10,000 cap, which is exactly why the PTET election matters: the entity-level deduction has no cap at all. Because the entity deducts the state tax before profits flow to your K-1, the benefit shows up in your business income. You get it whether or not you itemize on your personal return.

What actually happens

  • The state tax paid by the entity is deductible on the federal tax return
  • This reduces the owners' federal taxable income
  • The owners then receive a credit on their state return for their share of PTET paid by the business

Example Savings Calculation

Scenario 1: Taking the standard deduction because you don't have enough itemized deductions to exceed the standard deduction threshold

An S corp with $500,000 of profit pays $45,000 of state tax through PTET. The federal K-1 income drops to $455,000, saving about $16,650 of federal tax at 37%. The owner then claims the state credit for the $45,000, so state tax is unchanged. Without PTET, the owner would have deducted at most $10,000 to $40,400 of state tax personally, and possibly none of it beyond the cap.

How to make the election

We will handle the PTET election for you, either when filing your tax return or during the year when the election is due. Many states require quarterly estimated payments, and our team will notify you of these deadlines and payment requirements throughout the year.

Each state runs its own version (election deadlines, rates, which owners qualify, and whether the election binds all owners), and a few states still have no PTET. We track the rules for your states; the key thing on your side is responding quickly when we flag an election or estimated payment deadline.