The Pass-Through Entity Tax (PTET) and How It Affects You
The Pass-Through Entity Tax is a powerful workaround for the $10,000 SALT cap that can save business owners thousands. Here's how it works.
Pass-Through Entity Tax (PTET)
Background: The SALT Cap Problem
The Tax Cuts and Jobs Act capped state and local tax (SALT) deductions at $10,000. This particularly hurt business owners in high-tax states.
What Is the PTET?
A workaround approved by the IRS in 2020 that allows pass-through entities (partnerships, S-Corps) to pay state income taxes at the entity level rather than the individual level.
Why it works: The $10,000 SALT cap only applies to individuals. There's no cap on business deductions for state income taxes.
States Offering PTET
Over 30 states now offer PTET elections, including many high-tax states. Illinois introduced its PTET in 2021.
How It Works
- The entity elects to pay state income taxes on behalf of partners/shareholders
- Entity deducts the full PTET payment (not subject to $10K cap)
- Individual owners receive a state tax credit equal to the PTET paid on their behalf
Example Savings
- Business earns $500,000; owners pay $24,750 in Illinois income tax
- Without PTET: Only $10,000 deductible (SALT cap)
- With PTET: Full $24,750 deductible at entity level
- Tax savings (37% bracket): ~$5,462 additional federal deduction
Election Requirements
Generally must elect by a deadline, often within the tax year. Check your state's specific rules.
Own a pass-through business? The PTET election could save you thousands annually.