Pass-Through Entity Tax (PTET) for S-Corps and LLCs: The SALT Cap Workaround in 2026

The OBBBA (July 2025) quadrupled the individual SALT deduction cap to $40,400 — but that increase phases out completely for earners above roughly $606,000 of MAGI.¹ For high-income S-corp and LLC owners in California, New York, New Jersey, or any other high-tax state, the pass-through entity tax (PTET) election remains the most powerful tool for restoring the full state income tax deduction.

The 2026 SALT Cap Under OBBBA

Before OBBBA, the SALT deduction was capped at $10,000 for everyone. Starting with 2025 returns, OBBBA raised the cap — but added a phaseout that disproportionately affects business owners with high income:¹

In practice: a California S-corp owner netting $750,000 is fully phased out and still capped at $10,000, while California's top marginal rate on that income is 13.3% — roughly $100,000 of state tax. PTET closes that gap.

What Is PTET?

Pass-through entity tax is a state-level election that shifts the state income tax obligation from the individual owner to the business entity. The entity deducts that payment as a federal business expense — bypassing the individual SALT cap entirely — and the owner receives a corresponding state tax credit.

The IRS confirmed this structure is legitimate in Notice 2020-75 (November 2020), and it survived OBBBA intact: a late-stage provision that would have eliminated PTET for service partnerships and S-corporations was removed before passage.²

Available to: S-corporations, partnerships, and multi-member LLCs taxed as partnerships.
Not available to: Sole proprietors and single-member LLCs (disregarded entities).

PTET Savings Estimator

Estimates only. Does not account for state-specific credit mechanics, AMT, or NIIT. Consult a qualified CPA for your actual numbers.

Who Benefits Most in 2026

PTET delivers the largest benefit when three factors converge:

1. MAGI above the phaseout zone (~$606K+). Below $505K, the new $40,400 SALT cap may cover most or all of your state taxes depending on the state. The compelling PTET cases are owners fully phased back to $10,000.
2. High state income tax rate. California (13.3%), New York (up to 10.9%), New Jersey (10.75%), Oregon (9.9%), Minnesota (9.85% — but PTET expired there 12/31/2025³), Massachusetts (9% on capital income, 5% on ordinary). Low-tax or no-income-tax states provide little benefit.
3. S-corp or partnership structure. Sole proprietors and SMLLCs cannot make PTET elections — they're disregarded entities. This is one planning reason to consider S-corp election above ~$200K of net income.

State Availability (2026)

As of 2026, 36+ states plus the District of Columbia have enacted PTET legislation.⁴ Key state notes:

• California: Election can be made retroactively through 2030 for prior years; estimated PTET payments required by June 15 to avoid underpayment penalties.
• New York: Annual election must be made by March 15 (or by the first estimated payment date for new elections); cannot be revoked once made. NYC PTET also available for city residents.
• New Jersey: Automatic election for entities with ≥2 owners; no opt-out available.
• Illinois: PTET made permanent (no sunset).
• Virginia: PTET extended to January 1, 2027; check for renewal.
• Minnesota: PTET expired December 31, 2025 — not available for 2026 unless reenacted.³
• Texas, Florida, Nevada, Wyoming, South Dakota, Washington: No state income tax; PTET irrelevant.

Each state has different mechanics for election deadlines, estimated payments, and partner/shareholder credit application. Work with a CPA who knows your state's PTET rules before electing.

The QBI Interaction: A Hidden Cost to Model

PTET paid at the entity level reduces the S-corp's ordinary income or the partnership's net income — which flows through on the K-1 and reduces your qualified business income (QBI) for the § 199A deduction. At the 23% QBI deduction rate for 2026,⁵ every $100,000 of PTET reduces your QBI deduction by $23,000. At a 37% marginal rate, that costs ~$8,510 in additional federal tax.

For most high-income owners in high-tax states, the net benefit of PTET still significantly exceeds this QBI cost — but the offset should be part of your CPA's analysis, not an afterthought.

How to Make the PTET Election

1. Confirm your state has PTET and identify the election deadline (often March 15 or April 15 of the tax year).
2. Run the math with your CPA. Verify the net benefit after QBI offset, estimated PTET payments, and state credit mechanics.
3. Elect at the entity level. For S-corps, all shareholders must typically consent. For partnerships, agreement of partners holding a majority interest is usually required.
4. Make estimated PTET payments during the year if required (California and New York both require this to avoid penalties).
5. Claim the state credit on your individual return. The credit typically equals the PTET paid, offsetting your individual state tax liability on the pass-through income.

PTET and Financial Planning: The Bigger Picture

PTET doesn't exist in isolation. A fee-only financial advisor who specializes in S-corp and LLC owners can model PTET alongside your QBI deduction strategy, reasonable salary planning, cash balance plan stacking, and exit planning. The interaction between these decisions — especially at incomes above $400K — is where a specialist pays for themselves many times over.