PTET Elections by State
One of the highest-return items available to a profitable owner, and among the most frequently missed.
A pass-through entity tax election allows a partnership or S-corp to pay state income tax at the entity level, where it is fully deductible as a business expense, rather than passing the liability to owners whose federal deduction for state and local taxes is capped. Most states now offer one. For an owner in a high-tax state it converts a largely non-deductible personal expense into a fully deductible business one.
The Problem It Solves
The federal deduction for state and local taxes on an individual return is capped. An owner paying substantial state income tax on pass-through business income loses most of the federal benefit of that payment.
The PTET election moves the payment. The entity pays the state tax and deducts it as an ordinary business expense, which reduces the income flowing to the owner. Because it is an entity-level business expense rather than an individual itemized deduction, the individual cap does not reach it. The IRS confirmed this treatment in Notice 2020-75, which is what triggered most states to adopt these regimes.
What It Is Worth
The benefit is the federal tax on the state tax that becomes deductible. For an owner with $700,000 of pass-through income in a state with a 6 percent income tax, roughly $42,000 of state tax shifts from largely non-deductible to fully deductible. At a 37 percent federal rate that is about $15,000 a year.
In higher-tax states the figure is larger. An owner with $900,000 of income in a 9 percent state converts roughly $81,000 of state tax, worth around $30,000 federally. Relative to the effort of making an election, this is among the highest returns available.
How the Regimes Differ
State rules vary enough that a general approach does not work. The dimensions that matter:
- Annual versus binding elections. Some states require an election every year; others bind for multiple years once made.
- Election timing. Some require the election during the tax year, others allow it with the return. Missing an in-year deadline forfeits the year entirely.
- Estimated payment requirements. Several states require estimated payments during the year, and a missed payment can invalidate the election even where the election itself was timely filed.
- Owner credit mechanics. Most states give owners a credit for the entity-level tax paid; a few use an exclusion instead, which affects the arithmetic.
- Resident credit interaction. For owners with income in several states, whether the home state grants a credit for another state's PTET varies, and getting this wrong can produce double taxation.
Where It Does Not Apply
States without a personal income tax have no PTET regime and nothing to elect, which includes Texas, Florida, Washington, Nevada, South Dakota, Wyoming, Alaska, and New Hampshire on ordinary income. A small number of income-tax states have still not enacted a regime.
The election is also unavailable to sole proprietorships and single-member LLCs that have not elected entity treatment, because there is no pass-through entity to make it. For an owner in a high-tax state, that limitation is occasionally reason enough to reconsider the entity structure.
Why It Gets Missed
Three reasons recur. It is a separate election rather than a line on the return, so it does not surface during preparation. Its deadlines frequently fall during the tax year, when a compliance-oriented relationship has no scheduled contact. And in multi-state situations the analysis requires modeling several states together, which is planning work rather than filing work.
It is one of the most common findings in a three-year lookback, and prior years generally cannot be recovered, because the election had to be made contemporaneously. Each missed year is permanently gone, which is what makes it worth a calendar entry.
Key Takeaways
- The PTET election moves state tax to the entity, where the individual SALT cap does not reach it.
- Worth roughly $15,000 a year on $700,000 of income in a 6 percent state.
- Deadlines and estimated payment rules vary by state and a miss can invalidate the election.
- Sole proprietorships and disregarded single-member LLCs have no entity to make the election.
- Missed years generally cannot be recovered later, so it belongs on a planning calendar.
Start With the Pillar Guide
Frequently Asked Questions
What is a PTET election?
An election allowing a partnership or S-corp to pay state income tax at the entity level, where it is deductible as a business expense, instead of passing the liability to owners subject to the federal cap on state and local tax deductions. The IRS blessed the approach in Notice 2020-75.
How much does a PTET election save?
Roughly the federal rate applied to the state tax that becomes deductible. On $700,000 of income in a 6 percent state that is about $15,000 annually; in a 9 percent state on $900,000 of income it is closer to $30,000.
Can I make the election for a prior year?
Generally no. Most states require the election to be made contemporaneously, and several require estimated payments during the tax year. A missed year is usually permanently lost, which is why the deadline belongs on a planning calendar rather than being addressed at filing.
Does the election ever make things worse?
It can in specific situations, particularly for owners with income in several states where the home state does not grant a resident credit for another state's entity-level tax, which can produce double taxation. Multi-state owners should have the interaction modeled before electing.
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