What is the pass-through entity tax (PTET) election?
Useful in states that offer it; not available for Texas income
A PTET election lets a partnership or S corporation pay state income tax at the entity level. Under IRS Notice 2020-75, the entity deducts that tax, so it is not subject to the individual SALT cap in IRC §164(b)(6). For 2026, the cap is $40,400, reduced for modified AGI above $505,000 but not below $10,000. Texas has no individual income tax and no PTET.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The entity pays the state tax and deducts it federally; owners usually receive a state credit or exclusion under state law.
- The 2026 SALT cap is $40,400 ($20,200 married filing separately), reduced by 30% of modified AGI above $505,000, with a $10,000 floor.
- The One Big Beautiful Bill Act did not restrict PTET elections.
- The PTET deduction also reduces qualified business income, which can reduce the §199A deduction.
- Texas-only income gets no benefit, because Texas has no individual income tax.
What it is
Individuals can deduct state and local taxes only up to the SALT cap. Owners of pass-through businesses in states with income taxes often pay far more state tax than the cap allows them to deduct.
Most states with an individual income tax now let partnerships and S corporations elect to pay state tax at the entity level. The entity deducts the tax in computing its income, and the owners receive a credit or exclusion on their state returns. The federal deduction moves from the owner's itemized deductions, where it is capped, to the business's income, where it is not.
What the law says
IRC §164(b)(6) limits an individual's deduction for state and local taxes. As amended by the One Big Beautiful Bill Act, §164(b)(7) sets the applicable limitation amount at $40,000 for 2025 and $40,400 for 2026, increasing 1% a year through 2029 and returning to $10,000 after 2029. The amount is reduced by 30% of modified AGI above a threshold of $500,000 for 2025 and $505,000 for 2026, but not below $10,000. Married individuals filing separately use half of these amounts.
IRS Notice 2020-75 announced that specified income tax payments made by a partnership or S corporation are deductible by the entity in computing its taxable income and are not taken into account in applying the SALT limitation to its owners. The final version of the One Big Beautiful Bill Act did not limit this treatment.
State law controls whether an election is available, who may elect, how the tax is computed, and how owners get credit. The mechanics differ widely from state to state.
Requirements and tests
Check these before electing:
- The entity is a partnership or S corporation in a state that offers a PTET election.
- The owners are eligible under state law (some states exclude certain owners, such as corporations or trusts).
- The election deadline and estimated payment schedule in each state.
- How owners claim the credit or exclusion, and whether their resident state credits PTET paid to other states.
- The owners' SALT cap after the modified AGI phase-down, and whether they itemize.
- The effect on each owner's QBI deduction and on any owners who would not benefit.
How it works
The entity computes the state tax on its income, pays it, and deducts it on its federal return. Each owner's share of federal income is lower by the amount of the tax, and the owner claims the state credit for the tax paid on the owner's behalf.
The federal benefit is the extra deduction the owner would not otherwise get. If the owner's SALT cap is already filled or the owner takes the standard deduction, nearly the whole payment is an extra deduction. If the owner has unused cap room, the benefit is smaller.
Because the PTET deduction reduces business income, it also reduces qualified business income and can reduce the §199A deduction. The net federal benefit should be computed after that effect.
Texas does not impose an individual income tax and has no PTET. Its franchise tax is an entity-level tax that the entity deducts already. Texas owners benefit from a PTET election only for income taxed by another state that offers one.
Timing matters for the federal deduction. The entity generally deducts the PTET in the year it pays it, so estimated payments made by December 31 can be deducted that year, subject to the entity's accounting method. Owners should also confirm how their resident state treats PTET paid to another state.
Assumptions: Tax year 2026; the sole owner is married filing jointly, materially participates (no NIIT), has no other income, and takes the $32,200 standard deduction.; The S corporation's income is $1,100,000 before state tax; the state tax is $100,000, and the state gives the owner a full credit when the entity pays it; no other state or local taxes.; The owner's modified AGI is at least $606,334 in both cases, so the SALT cap is reduced to the $10,000 floor, which is below the standard deduction.; The §199A W-2 wage limit is assumed not to bind; the deduction is limited to 20% of taxable income. Taxable income stays above $768,700, so the marginal rate is 37%.
| No PTET: taxable income before QBI ($1,100,000 − $32,200) | $1,067,800 |
|---|---|
| No PTET: QBI deduction (20% × $1,067,800) | $213,560 |
| No PTET: taxable income | $854,240 |
| PTET: taxable income before QBI ($1,000,000 − $32,200) | $967,800 |
| PTET: QBI deduction (20% × $967,800) | $193,560 |
| PTET: taxable income | $774,240 |
| Reduction in taxable income | $80,000 |
| Federal tax difference ($80,000 × 37%) | $29,600 |
The $100,000 PTET payment lowers federal taxable income by $80,000, not $100,000, because it also reduces the QBI deduction.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
Errors usually involve missed state deadlines, ineligible owners, inconsistent treatment among owners, and mismatches between the federal deduction year and the payment year. For S corporations, disproportionate PTET payments can raise questions about a second class of stock, which states and practitioners address in different ways.
Who it is not for
This is not for Texas-only income. It is not for businesses in states that do not offer an election. It is not always helpful for owners with unused SALT cap room or for owners whose QBI deduction would drop significantly. And it does not create a deduction for tax the state would not otherwise collect.
How ebotCPA helps
We confirm the election is available in each state where you owe tax, model the federal benefit after the SALT cap and QBI effects, and handle the elections, payments, and owner credits.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Frequently asked questions
Does Texas have a PTET election?
No. Texas has no individual income tax, so there is no state income tax to shift to the entity.
Did the One Big Beautiful Bill Act eliminate PTET workarounds?
No. The final law raised the SALT cap and added a phase-down but did not restrict PTET elections.
What is the 2026 SALT cap?
$40,400 ($20,200 married filing separately), reduced by 30% of modified AGI above $505,000, but not below $10,000.
Does a PTET election affect the QBI deduction?
Yes. The entity's deduction for state tax reduces qualified business income, which can reduce the §199A deduction.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.