Pass-through entity tax elections explained

Why do PTET elections exist?

Individuals who itemize can deduct state and local taxes only up to a cap. The 2025 tax law raised that cap from $10,000, with a reduction for higher incomes and a scheduled return to $10,000 in 2030. Business owners above the cap get no federal deduction for the state income tax on their business profit. Taxes paid by a business entity on its own income are not subject to that cap, so states created elective entity-level taxes. The IRS confirmed in 2020 that such taxes are deductible by the entity, and the 2025 law left that treatment in place.

How does it work?

1. The entity elects

   On or by the state's deadline, often on the return or a separate form.

2. The entity pays the state tax

   Often by estimated payments during the year.

3. The entity deducts it federally

   Reducing the income passed to owners on their K-1s.

4. Owners claim a state credit

   Or exclude the income, so it is not taxed twice in the state.

What does an example look like?

An S corporation with one owner earns $500,000 in a state with a 5% tax. Without the election, the owner pays $25,000 of state tax personally, and the federal deduction for it is limited by the cap. With the election, the S corporation pays the $25,000 and deducts it, so federal taxable income passed to the owner falls by $25,000. At a 35% federal rate, that saves about $8,750, and the owner's state return gives a credit for the tax the entity paid.

Who benefits most?

Owners above the cap, in states with income tax, with substantial pass-through profit. It helps less for owners whose state and local taxes are already under the cap, and can complicate matters for non-resident owners, whose home state may not credit the tax paid by the entity.

What should you check before electing?

• Whether every owner benefits, especially non-residents and owners in other states.
• The state's election deadline and estimated payment dates.
• The effect on the qualified business income deduction, which falls because entity income falls.
• Whether the state requires all owners to consent or allows it entity by entity.

See how states tax LLC and S corp income and year-end tax planning.

Some states also require the election to be made before or during the year, rather than on the return, and may require payment of estimated tax by the entity from the first quarter.

Which states offer it?

More than 30 states, including California, New York, New Jersey, Illinois and Georgia, each with its own rules on who can elect, deadlines, rates and how owners claim credit. Some make the election annually on the return, others need a separate form or early estimated payments. Check the rules in each state where the entity files.

What about owners who live in another state?

An owner's home state may or may not give a credit for tax the entity paid to another state. If it does not, the election can leave that owner worse off. Model each owner's position before electing.

Can a single-member LLC use it?

In most states, no: a disregarded single-member LLC is not a separate taxpayer for the election. A sole owner wanting the benefit would need an S corporation election first, which brings its own costs. See when an S corp election saves tax.

This guide is general information. It is not tax or legal advice for your situation.