Pass-Through Entity Tax (PTET) Elections in 2026: SALT Strategy for S-Corps & Partnerships
Rick Patel
on
Introduction
Many owners heard that the federal SALT cap rose to $40,400 for 2026 and quietly concluded the pass-through entity tax (PTET) election no longer matters. For a large share of profitable S corporation and partnership owners, that conclusion is expensive.
The higher cap phases down once modified adjusted gross income (MAGI) passes $505,000, and it can shrink all the way back to $10,000. Owners in that range often see no federal benefit from the state income tax they already pay. A PTET election moves that tax to the entity, where it is generally deductible without running into the individual cap.
This guide is written for business owners, founders, CFOs and finance leaders who run S corporations or partnerships. It explains how PTET works in 2026, where the SALT cap still bites, how S corps and partnerships differ, which state rules to verify, and how to decide whether an election is worth the compliance effort.
What Is a Pass-Through Entity Tax (PTET)?
A pass-through entity does not pay federal income tax at the entity level. Partnerships and S corporations report income on Form 1065 or Form 1120-S and pass it to owners on Schedule K-1. Each owner then reports that income and pays tax personally, including state income tax.
That structure created a problem after 2017. Individuals who itemize can deduct state and local taxes only up to the SALT cap. State tax paid on pass-through income counted toward that cap, so high earners often lost the deduction.
States responded with PTET regimes. Under a PTET election, the partnership or S corporation pays state income tax on its own income. The owners then receive a credit, an exclusion or a similar benefit on their personal state returns so they are not taxed twice.
The federal piece rests on IRS guidance. In Notice 2020-75, the IRS and Treasury announced their intention to issue regulations confirming that state and local income taxes imposed on and paid by a partnership or S corporation are deductible in computing its non-separately stated income or loss for the year of payment. The notice states that these payments are not taken into account in applying the SALT limitation to the owners.
More than 30 states now have some form of elective PTET regime, and the details vary widely. States with no personal income tax, such as Texas and Florida, generally have nothing to elect.
The 2026 SALT Cap: What Changed and Why It Still Matters
The One Big Beautiful Bill Act (Public Law 119-21) raised the individual SALT deduction limit for 2025 through 2029, then returns it to the older level. The Congressional Research Service overview of the law is a useful federal starting point for the provisions.
| Item | 2025 | 2026 |
|---|---|---|
| SALT cap (single, joint, head of household) | $40,000 | $40,400 |
| SALT cap (married filing separately) | $20,000 | $20,200 |
| MAGI where phase-down begins | $500,000 | $505,000 |
| MAGI where phase-down begins (married filing separately) | $250,000 | $252,500 |
| Floor after phase-down | $10,000 | $10,000 |
| Floor after phase-down (married filing separately) | $5,000 | $5,000 |
The cap is scheduled to increase by 1% each year through 2029. For tax years beginning after 2029, the cap is scheduled to revert to $10,000 ($5,000 for married filing separately), unless Congress changes the law.
How the 2026 phase-down works. For 2026, the cap is reduced by 30% of the amount by which MAGI exceeds $505,000. The reduced cap cannot fall below $10,000.
Here are three illustrations for a joint return:
- MAGI of $555,000: The excess is $50,000, the reduction is $15,000, and the cap is $25,400.
- MAGI of $605,000: The excess is $100,000, the reduction is $30,000, and the cap is $10,400.
- MAGI of $606,334 or more: The cap reaches the $10,000 floor.
The cap covers the combined state and local income or sales taxes and real and personal property taxes that an individual deducts on Schedule A. Owners must itemize to use it at all. For a profitable owner with a large state income tax bill on K-1 income, property taxes alone can consume much of a reduced cap.
That is the gap PTET addresses. The entity-level payment sits outside the individual cap, so the state tax on business income no longer competes with property taxes and personal state taxes for limited space. For a broader primer on how these taxes fit together, see Virtue Advisors' guide to SALT tax for business owners.
How a PTET Election Works Step by Step
The mechanics follow the same general pattern in most states, although forms, deadlines and rates differ.
- The entity makes the election. Depending on the state, the election is made on the entity's return, through an online portal, or by a separate form by a stated date.
- The entity pays the state tax. Payment is often through estimated installments, and some states require the first installment before the election is even filed.
- The entity deducts the tax federally. Under Notice 2020-75, the payment reduces non-separately stated income or loss on the entity return for the year of payment.
- Owners receive K-1 income reduced by the tax. The lower K-1 figure flows to the owner's federal return.
- Owners claim the state benefit. Most states give owners a credit, and some use an exclusion or similar mechanism, so the state tax is not duplicated.
An illustrative example. Assume an S corporation with ordinary business income of $1,000,000 before PTET, owned by one shareholder who lives in a state with a hypothetical 5% PTET rate. The shareholder is in the 37% federal bracket, is already at the $10,000 SALT floor because of property taxes, and can otherwise claim the full QBI deduction.
| Step | Amount |
|---|---|
| PTET paid by the S corporation (5% x $1,000,000) | $50,000 |
| Federal deduction at the entity level | $50,000 |
| Federal tax saving at 37% | $18,500 |
| Lower qualified business income (QBI) deduction (20% x $50,000 = $10,000, taxed at 37%) | ($3,700) |
| Estimated net federal benefit | $14,800 |
The shareholder's state credit offsets the state tax, so the state cost is broadly neutral in this simplified case. The QBI line matters because PTET reduces the income that qualifies for the deduction. Wage and property limits, taxable income limits and the type of business can change the result. The rate, credit rules and facts of your state and entity will change the numbers, so treat this as a model rather than a forecast. The mechanics of the deduction are covered in Virtue Advisors' guide to Form 8995 and the QBI deduction.
Why PTET Still Matters When the Cap Is $40,400
The higher cap reduced the value of the workaround for some households. It did not eliminate it. Five factors keep PTET relevant in 2026.
1. High earners are pushed toward the $10,000 floor. Owners with MAGI above roughly $606,000 (other than married filing separately) generally receive no benefit from the enhanced cap. Their state tax on business income is the same as before, but the federal deduction is capped at $10,000.
2. The cap is shared. One cap applies to the entire return. Property taxes, state income tax on wages and PTET-eligible income all compete for the same space. Entity-level payments remove the business income tax from that competition.
3. PTET can lower MAGI. Because the entity deducts the payment, K-1 income falls. A lower MAGI may leave more of the enhanced cap available to the owner, although the effect depends on how close the owner is to the threshold.
4. It can change the itemizing decision. For 2026, the standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers, according to the IRS 2026 inflation adjustments. When PTET lowers itemized deductions below the standard deduction, the owner may still claim the entity-level deduction and use the standard deduction. That combination can beat itemizing.
5. The enhanced cap is temporary. The cap is scheduled to fall back to $10,000 after 2029, and many states have set sunset dates for PTET regimes that assume the federal cap is in place. Building the compliance process now avoids a rushed decision later.
Other technical effects can matter. For partnerships, PTET can reduce the income on which general partners pay self-employment tax. For S corporations, wages already carry payroll tax and PTET does not change that. And because state and local taxes are not deductible in computing the alternative minimum tax at the individual level, an entity-level deduction may help owners who are subject to AMT. Each of these effects depends on the owner's facts.
Who may not benefit. PTET is not automatic value. It can be a poor fit when:
- The owner's MAGI is well below the phase-down range and the owner itemizes with room to spare under the cap.
- The state does not provide a credit or exclusion that the owner can fully use.
- Owners have very different tax profiles and cannot agree on the election.
- The compliance cost is close to the federal benefit.
- ntity has low profit or volatile income, making estimated payments hard to size.
S Corporations vs. Partnerships: Where the Rules Differ
Both entity types can generally make PTET elections, but the planning issues are not the same. Virtue Advisors' LLC vs S corp vs C corp tax comparison explains how entity choice shapes these outcomes.
S corporations
- One class of stock. An S corporation may have only one class of stock. PTET and distributions must be handled consistently with the governing documents and applicable state law, so allocation of the tax among shareholders needs careful review.
- Owner wages. Shareholder wages are already deducted, so the PTET base is generally the entity's income after wages. State definitions of the base vary.
- Basis. The entity-level deduction reduces income passed through to shareholders and can reduce stock basis and distribution planning.
- Consent. Some states require shareholder consent or a majority vote for the election.
Partnerships and LLCs taxed as partnerships
- Special allocations. Partnership agreements often allocate income and loss unevenly. PTET should follow the agreement, and the agreement may need amending to address how the tax is charged to each partner.
- Guaranteed payments. These payments are treated differently from distributive share, and states differ on whether they enter the PTET base.
- Tiered structures. When a partner is itself a partnership, trust or corporation, some states limit who may receive the credit or how it works.
- Mixed ownership. Non-resident partners, tax-exempt partners and individuals in states without an income tax can have very different outcomes from the same election.
- Professional practices. Law firms, accounting firms and other professional practices structured as partnerships or S corporations may elect where state law allows.
The 2026 State Landscape: What to Verify Before You Elect
State law decides whether a PTET election works, so it should be checked against the state's revenue department, not summaries. The table below highlights states with notable 2025 and 2026 developments. It is a starting list, not a complete survey.
| State | What to verify for 2026 |
|---|---|
| California | The elective PTE tax is 9.3% of qualified net income. Legislation extended the program through tax years 2026 to 2030, and a missed or short June 15 prepayment now triggers a 12.5% credit reduction instead of disqualifying the election. Confirm the calculation with the Franchise Tax Board. |
| New York | The annual election is due by March 15 of the tax year and generally cannot be extended. Quarterly estimated payments apply. New York City has a separate PTET, so see the New York PTET page and the NYC PTET page. |
| Illinois | Illinois removed the sunset in December 2025, so the regime is now permanent. |
| Maryland | For tax years beginning after December 31, 2025, the base for resident owners expands to include all-source income, which can create issues for entities with owners in different states. |
| Michigan, Alabama, Oklahoma | These states moved election timing later or onto the return itself, giving owners more time to decide with better numbers. |
| Virginia | The regime has moved through short extensions, so confirm the current statute and sunset date. |
The timing note matters for 2026 planning. Some states set election deadlines early in the year, such as New York's March 15 date. If you missed a 2026 election in a state like that, the practical planning window is 2027. Other states allow the election on the return, so a 2026 decision can still be available.
Owners with income in several states should be especially careful. A PTET election in one state does not automatically give credit in the owner's home state, and a state may treat the same payment differently from another. For a wider look at how state and federal filings interact, see federal vs. state tax filing.
Timing Rules That Trip Up Elections
Four different dates can apply to one PTET election, and confusing them is a common source of lost benefits.
- Election date: The date the state requires the election to be made.
- Payment dates: Estimated installments or prepayments that may be required to keep the election or the full credit.
- Federal deduction year: Under Notice 2020-75, the federal deduction generally follows the year of payment. For a calendar-year entity, a payment made by December 31, 2026 is a 2026 payment. December 31, 2026 falls on a Thursday.
- Return due date: For calendar-year partnerships and S corporations, 2026 returns are due on Monday, March 15, 2027, and the extended due date is Wednesday, September 15, 2027.
The federal deduction year and the state tax year do not always line up. An entity that pays the state tax in early 2027 for 2026 income may not receive the federal deduction until 2027. Some entities make a year-end catch-up payment to bring the deduction into the year they need it, if the state allows it and credits it properly. Confirm each point before relying on it.
Cash flow also deserves attention. PTET payments leave the entity, so distributions to owners are lower unless funded separately. Owners still make personal estimated payments on other income, and the entity's payment schedule should be built into cash forecasting. Virtue Advisors' estimated tax payment guide covers the personal side of that calendar.
Strategic Insights: Mistakes and Hidden Risks
Most PTET problems come from process gaps rather than the concept itself.
- Treating the election as a form. The benefit depends on credit rules, owner residency, apportionment and the mix of owners. Confirm each before electing.
- Ignoring the owner's home state. A resident owner may have credit limits, carryforwards or rules for taxes paid to other states that change the value of the election.
- Missing the state deadline. Some states offer no relief. A missed election may mean a full year without the workaround.
- Under-paying required installments. Penalties, reduced credits or an invalid election can result, depending on the state.
- Overlooking QBI and other side effects. The federal deduction reduces qualified business income, which lowers the QBI deduction, as the example above shows.
- Forgetting basis and distributions. The entity-level payment reduces income and can reduce basis, which affects distributions and loss limitations.
- Relying on old operating agreements. Partnership agreements and S corporation governing documents may not address who bears the tax. Update them before electing.
- Assuming the law will not change. Federal legislation in 2025 preserved the workaround, and an earlier House proposal that would have limited it for certain service businesses was not included in the final law. That can change in the future. The AICPA's advocacy to protect the PTET SALT deduction shows how closely the profession follows this issue.
Practical Recommendations: A 2026 PTET Decision Checklist
Use this sequence to move from the idea to a documented decision.
- Map your owners. List each owner's state of residence, entity type, expected MAGI and whether the owner itemizes.
- Estimate the SALT cap position. Compare expected MAGI to the $505,000 threshold and add property and other state and local taxes to see how much of the cap is used.
- Model the federal benefit. Include the entity deduction, the QBI effect, self-employment tax for partners, AMT exposure and the standard deduction comparison.
- Model the state effect. Confirm the PTET rate, the credit or exclusion rules, carryforwards and how each owner's home state treats the credit.
- Check the calendar. Record the election deadline, each installment date, the federal payment year and the return due date for every state.
- Confirm governance. Review the operating or partnership agreement, obtain any required consent and document how the tax is allocated.
- Set payments and cash flow. Build the installments into the forecast and adjust distributions.
- Coordinate the returns. Make sure the entity return, K-1s and personal returns all report the election consistently.
- Document the decision. Keep a memo of the analysis, assumptions and approvals.
- Revisit every year. Rates, state rules, owner mix and the federal cap all move.
How Virtue Advisors Supports PTET Planning
PTET decisions sit between federal tax, state tax, entity governance and cash planning, so they rarely fit into a single return review. Virtue Advisors, a CPA and advisory firm based in Alpharetta, Georgia, supports business owners with state and local tax compliance, entity-level planning and the related return work.
In practice, that means comparing the election with and without PTET across owners, checking state-specific credit and deadline rules, coordinating the entity return with each owner's return, and building the payment schedule into financial planning. Businesses that want ongoing support can also review Virtue Advisors' business tax services.
The goal is a documented, defensible decision, not a default election. In some cases the right answer is to skip the election, and that result is worth knowing before the deadline.
Conclusion
The higher 2026 SALT cap changed the math for many households, but it did not make PTET obsolete. For owners in the phase-down range and above, the election can still convert a capped state tax cost into a federal deduction, and it can add value through MAGI, itemizing and self-employment effects.
The election also carries deadlines, payment rules and side effects that punish late or rushed decisions. The best time to model it is before the state deadline, with the full owner group in view. If your entity has not reviewed PTET for 2026 and 2027, consider scheduling a planning conversation with a CPA who can model the numbers across your owners and states.
Frequently Asked Questions
