Business owners who operate through an S corporation or partnership have a tool most W-2 employees don’t: the pass-through entity tax (PTET) election, which lets the business itself pay state income tax and deduct it as a business expense — sidestepping the federal cap on state and local tax (SALT) deductions entirely.
Why This Workaround Exists
Since 2018, individual taxpayers who itemize have been limited in how much state and local tax they can deduct on their federal return. OBBBA raised that cap to $40,000 for 2026 (up from the prior $10,000), phasing down for higher earners starting at $505,000 of income. But PTET elections operate outside that individual cap altogether — when the entity pays the tax, it’s an ordinary, fully deductible business expense at the entity level, never subject to the SALT cap in the first place.
How the Mechanics Work
The pass-through entity elects, at the state level, to pay state income tax directly rather than passing that liability through to the owners on their individual K-1s. The entity deducts the payment as a business expense, which reduces the pass-through income reported to owners. Owners then typically receive a state-level credit or reduction on their personal return for the tax already paid by the entity, so the state tax still effectively gets paid once — it just moves off the individual return, away from the SALT cap.
Which States Offer It
More than 30 states now have some form of PTET election available. California’s PTET is extended through 2030, Illinois made its election permanent, Utah eliminated its sunset date, Oregon extended its election through 2028, and Minnesota extended its regime through the same year. Availability and mechanics vary significantly by state, so check your specific state’s Department of Revenue guidance before assuming the election works the same way everywhere.
Who Should Consider It
This is relevant almost exclusively to owners of S corporations, partnerships, and multi-member LLCs taxed as partnerships — sole proprietors and single-member LLCs without an S-election generally don’t have access to a PTET workaround, since there’s no separate entity return to make the election on. If you’re deciding between entity structures partly on tax grounds, this is one more factor to weigh alongside the basics we cover in our Qualified Business Income deduction guide.
The Election Isn’t Automatic
PTET elections generally have to be made annually, often with a specific deadline and sometimes an estimated payment due alongside the election itself. Missing the window for a given tax year typically means losing the workaround for that year with no way to retroactively fix it — this is a calendar-driven decision, not something to handle after the fact at filing time.
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