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The PTET Election: Why It Still Matters Even With a Higher SALT Cap

 

For the last several years, the pass-through entity tax (PTET) election has been one of the most reliable planning tools available to owners of partnerships, S-corps, and other pass-through businesses in high-tax states. Then the SALT deduction cap, the whole reason PTET exists, changed for the first time since 2017. That's led a lot of business owners to ask a fair question: does the PTET election still make sense?

 

The short answer is: for many people, yes, but the analysis genuinely got more nuanced, and it now depends heavily on income level. Here's the full picture.

 

Why PTET Exists in the First Place

 

The 2017 Tax Cuts and Jobs Act capped the itemized deduction for state and local taxes (SALT) at $10,000 per individual return. For business owners in high-tax states, that cap could mean losing a federal deduction for tens of thousands of dollars in state income tax actually paid.

 

States responded with a workaround. Since owners of pass-through entities (partnerships, S-corps) report business income on their personal returns, states began letting the business itself elect to pay state income tax at the entity level instead. The IRS blessed this approach in Notice 2020-75, confirming that specified income tax payments made at the entity level are deductible by the entity in computing its non-separately stated taxable income or loss, meaning the deduction happens above the line, at the business level, entirely outside the individual SALT cap. The owner then typically receives an offsetting state tax credit or deduction for their share.

 

More than 30 states now have some version of this workaround in place.

 

What Changed: The 2025 SALT Cap Increase

 

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, raised the individual SALT cap for the first time since the TCJA. The cap increased to $40,000 for 2025 and $40,400 for 2026, with a 1% annual increase scheduled for tax years beginning after 2026 and before 2030. For tax years beginning in 2030, the cap reverts to $10,000.

 

But there's a catch that matters a lot for higher earners: the increased cap is subject to a phasedown once modified adjusted gross income exceeds $500,000 for 2025 and $505,000 for 2026, with taxpayers who are fully phased down capped back at $10,000.The phase-out reduces the $40,000 cap by $1 for every $2 of MAGI above the threshold, reaching the $10,000 floor at roughly $560,000 of MAGI.

 

Importantly for anyone who assumed this workaround might get shut down as part of the broader SALT reform: the final OBBBA legislation excludes any further limitation on state PTETs. The mechanism itself survived intact.

 

So Does PTET Still Make Sense?

 

The honest answer: it depends on where a given owner's income falls relative to the new cap and phase-out range.

 

• Below roughly $500,000 MAGI, with total state tax under $40,000: The higher individual cap may now fully cover state tax liability without needing the PTET workaround at all. For these owners, the entity-level election adds compliance cost, a separate election, an entity-level payment, sometimes a filing fee, without any incremental federal benefit. It may still be worth keeping in the toolkit given the cap reverts to $10,000 in 2030, but the case for it in 2026 alone is weaker.

 

• Between the cap and the phase-out threshold, with state tax exceeding $40,000: Partial benefit, the portion of state tax above the individual cap is still deducted more efficiently at the entity level. Worth running the numbers rather than assuming either way.

 

• Above the MAGI phase-out (roughly $505,000–$560,000 for 2026, depending on filing status): This is where PTET remains just as valuable as it was under the original TCJA cap. Once an owner's individual SALT cap phases back down toward $10,000, the entity-level deduction becomes, in practical terms, the only mechanism left to fully deduct state income tax paid on business income.

 

There's also a secondary benefit that's independent of the cap analysis entirely: for many entities, a PTET election can help reduce the self-employment tax base tied to the underlying income, and by lowering the owner's reportable income, it can help preserve eligibility for the standard deduction and other income-sensitive breaks, though the self-employment tax effect depends on the character of the income and the partner's status, and isn't guaranteed in every situation.

 

The State Landscape Is a Patchwork

 

This is the part that trips up a lot of multi-state businesses: PTET is a state-law mechanism, and every state runs it a little differently. A few things worth knowing:

 

Sunset dates moved around. Several states had PTET regimes written with sunset provisions, and the federal cap increase forced legislative action. Illinois made its PTET permanent by removing the sunset provision in December 2025, and Virginia extended its sunset from January 2026 to January 2027. California extended its program through 2030, and Oregon extended through tax years beginning before January 1, 2028.

 

Election mechanics vary widely. Some states require the election and payment during the tax year itself, not at filing time — waiting until the spring to file a return is often too late for the current year. California, for example, historically required a mid-year prepayment to preserve the election, though recent legislation now allows valid elections even with a missed or underpaid June 15 deadline, with the credit reduced by 12.5% of the shortfall instead of invalidating the election entirely.

 

Credit mechanics differ. Some states provide less than a full 100% credit for PTET paid, Massachusetts caps it at 90% and credits may be refundable in some states and nonrefundable in others.

 

Rates move too. Georgia lowered its PTET rate from 5.39% to 5.19% for tax years beginning January 1, 2025, and Idaho lowered its rate as well, generally tracking changes in the state's individual or corporate rates.

 

Not every state has adopted PTET, and not every state conforms to the federal treatment the same way, this matters most for businesses with owners spread across multiple states, where credit reciprocity and residency rules can make the benefit uneven from one owner to the next.

 

What This Means in Practice

 

If a PTET election has been on autopilot for your business since it was first available, 2026 is a good year to revisit it rather than assume last year's answer still holds. The questions worth running through with your tax advisor:

 

What's each owner's projected MAGI, and where does that put them relative to the phase-out range?

 

What's the business's total state income tax liability, relative to the $40,000 individual cap?

 

Has your state changed its PTET rules, rates, or deadlines for 2026?

 

Are there multiple owners in different states, and does each state's credit mechanism actually make them whole?

 

None of this needs to be decided at tax filing time in most states, the election and the funding of it happen well before the return is prepared, which means the analysis has to happen proactively, not retrospectively.