PTE Elections: The SALT Cap Workaround That Saves Your Business Money

Pass-through entities, such as partnerships and S corporations, typically do not pay income tax at the entity level. Instead, income passes through to the owners and is reported on their individual tax returns. Federal limits on deducting state and local taxes can reduce the benefit of these owner-level deductions, particularly in high-tax states. Many states offer a pass-through entity tax (PTET), which allows the business to pay state income tax directly and pass the benefit through to owners. Making a PTE election can provide significant federal tax savings, simplify multi-state compliance, and give businesses greater flexibility in planning for both current and future tax obligations. Understanding how PTE elections work, the potential benefits, and the timing requirements is critical for any business considering this strategy.

PTET Prior to the One Big Beautiful Bill Act

PTET programs emerged following the Tax Cuts and Jobs Act of 2017 (TCJA), which limited the federal state and local tax (SALT) deduction to $10,000 for individuals who itemize deductions ($5,000 for married individuals filing separately). This limitation reduced the federal deductibility of owner-level state income taxes.

In response, many states enacted PTET programs, and businesses began making PTE elections to allow entity-level deduction of state taxes without regard to the SALT cap.

PTET After the One Big Beautiful Bill Act

The One Big Beautiful Bill Act (OBBBA) made the SALT deduction limitation permanent and increased the cap to $40,000 for most taxpayers. The legislation did not restrict PTE elections.

Accordingly, partnerships and S corporations may continue to deduct state income taxes at the entity level, often generating greater federal tax benefits than owner-level deductions.

PTE Elections: What They Mean for Your Business

A PTE election allows a pass-through entity to pay state income taxes at the entity level rather than passing that tax liability through to individual owners. Because the entity’s state tax payments are treated as a business deduction for federal tax purposes, this approach can help preserve federal tax benefits that would otherwise be limited by the individual SALT deduction cap.

For businesses operating in multiple states or with owners in high-tax jurisdictions, this can translate into material federal tax savings and more predictable tax outcomes year to year. The decision to make a PTE election involves weighing the federal deduction benefit against state-specific rules, deadlines, estimated payment requirements, and how individual owners will receive credits or other relief on their personal returns.

As states continue to refine their PTET programs, differences in election procedures and credit mechanisms make it important to revisit the decision annually.

State Pass-Through Entity Tax Changes to Know

Changes to PTET Rates

Several states have recently lowered their PTET rates to align with changes in individual or corporate tax rates:

• Georgia: 5.39% → 5.19% for tax years beginning January 1, 2025
• Idaho: 5.8% → 5.695% for 2024 tax year, applies to 2025 elections
• Indiana: 3.05% → 3.00% for 2025
• North Carolina: 4.5% → 4.25% for 2025
• Utah: 4.55% → 4.50% for 2025

Changes to Election Deadlines and Requirements

Other states have updated how and when businesses make PTE elections:

• Alabama: Starting in 2025, elections or revocations must be made on a timely filed return, including extensions. Previously, elections were submitted on a separate form.
• Michigan: Eligible entities now have until the last day of the ninth month after the end of the tax year to elect into the flow-through entity (FTE) tax. For calendar-year entities, this moves the election deadline from March 15 to September 30. Three-year irrevocable election rule remains.
• Oklahoma: PTE elections can now be made with the PTET return, including extensions. Previous separate form and revocation requirements are eliminated.
• Kansas: Legislation in 2024 changed PTET rules retroactively for tax years starting January 1, 2022. Key updates include aligning the PTET rate with the top individual tax rate, updated income sourcing rules, moving credits to owners, and maintaining estimated tax payment requirements.

Extended PTET Programs

• California: Senate Bill 132 extends PTET elections beyond their original sunset. Qualifying entities may elect entity-level tax for taxable years beginning January 1, 2026, through December 31, 2030. PTET rate remains 9.3% of qualified net income. Entities that miss mid-year prepayments can still make a valid election, though the credit to owners is reduced by 12.5% of the unpaid or underpaid amount.

Evaluating Benefits and Key Considerations

Although the concept of a PTE election is straightforward, the benefits can vary significantly based on entity structure, owner residency, and state-specific rules.

Timing is one of the most critical factors. Some states allow elections on the original return, while others require them by the first estimated payment due date. Missing a PTE election deadline can prevent businesses from deducting substantial entity-level tax payments. Consent requirements and credit mechanisms also vary by state.

Cash flow planning is equally important. Because the entity pays state income tax directly, businesses must ensure adequate liquidity and equitable treatment among owners. Entity-level payments may also reduce self-employment tax for certain owners, adding an extra layer of planning consideration.

Taking a Strategic Approach to PTE Decisions

PTE elections are most effective when evaluated as part of a broader tax strategy rather than as a standalone compliance step. Proactive planning allows businesses to align elections with long-term objectives, anticipate changes in state law, and maintain compliance across multiple jurisdictions.

As states continue to update their PTET programs, businesses should reassess PTE elections annually, considering deadlines, estimated payment requirements, owner residency, and cash flow implications.

At Calvetti Ferguson, our state and local tax team assists pass-through entities throughout the lifecycle of PTE elections—from analyzing multi-state rules and modeling owner-level impacts to planning estimated payments and ensuring compliance. A well-executed PTE election strategy can help maximize federal deductions, reduce owner-level tax exposure, and support informed decision-making as rules evolve.

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