For the past several years, the Pass-Through Entity Tax (PTET) election has been the primary tool small business owners used to work around the $10,000 SALT deduction cap. More than 30 states enacted PTET laws allowing S-corporations and partnerships to pay state income taxes at the entity level — where those taxes are fully deductible as a business expense — rather than flowing through to individual owners who face the cap.
The One Big Beautiful Bill Act, signed July 4, 2025, changed everything by raising the SALT cap to $40,000 for 2025 and $40,400 for 2026. For many business owners, the PTET calculation that clearly favored election two years ago now requires a much more careful analysis.
The short answer: PTET is still valuable for many business owners, but not all of them — and the break-even point shifted significantly.
What Is PTET and Why Did It Exist?
The Tax Cuts and Jobs Act (2017) capped the itemized deduction for state and local taxes at $10,000 for individuals. For business owners in high-tax states like California, New York, and New Jersey — where state income taxes alone can easily exceed $30,000 — this cap eliminated most of their state tax deduction.
States responded by creating PTET elections. Instead of the business owner paying state income tax personally (capped at $10,000), the entity pays it and deducts it as a business expense. The owner then receives a state tax credit to avoid double taxation. The net result: state taxes get federally deducted at the entity level, bypassing the individual SALT cap.
For a California S-corp owner in the 37% federal bracket paying $50,000 in state income taxes, PTET could save roughly $14,800 in federal taxes annually ($40,000 additional deduction × 37%) compared to the $10,000 personal SALT deduction.
What the OBBBA Changed
The OBBBA raised the individual SALT cap to $40,000 for 2025 and $40,400 for 2026, with modest inflation indexing through 2029. A phase-out applies at incomes above $500,000 MAGI, reducing the cap to a minimum of $10,000 at around $600,000 MAGI.
This matters for PTET analysis because the alternative to PTET — claiming state taxes as a personal itemized deduction — is now much more valuable. An owner who pays $35,000 in state income taxes can now deduct most of it personally (up to $40,400), whereas before they could only deduct $10,000.
The PTET advantage = entity-level deduction − personal SALT deduction under the new cap
For owners whose state income taxes are below $40,400, the PTET advantage shrinks dramatically. For owners whose state taxes are well above $40,400, PTET may still be very valuable.
The Phase-Out Wrinkle at High Incomes
The new SALT cap phases out for incomes above $500,000 MAGI. The phase-out rate is approximately 30 cents per dollar over $500,000, reducing the cap back toward $10,000 at roughly $600,000 MAGI.
This creates a counterintuitive situation: the highest earners actually benefit most from PTET, because the new $40,400 cap disappears for them. A partner earning $700,000 effectively still faces a $10,000 personal SALT cap — exactly what the PTET was designed to work around.
For these high earners, the OBBBA changed nothing. PTET election remains strongly advantageous.
For business owners in the $200,000–$500,000 income range, the new cap is valuable and the PTET advantage narrows. Whether PTET is still worth the compliance cost depends on specifics.
State-by-State Considerations
PTET rules vary significantly by state. Key variables include:
- Credit mechanics: Does the state credit flow to the owner's personal return dollar-for-dollar, or is there a haircut?
- Election deadlines: Many states have strict deadlines — often the first estimated payment due date of the tax year. Electing retroactively after December 31 is generally not possible.
- Rate matching: Some states apply the PTET at the entity's rate; others apply it at the highest individual marginal rate. California's rate (9.3%) differs from New York's election structure.
- Estimated payment requirements: PTET typically requires quarterly estimated payments at the entity level. Cash flow management matters.
High-traffic PTET states and 2026 status:
| State | PTET Available | Key 2026 Update | |-------|---------------|-----------------| | California | Yes (PTE Elective Tax) | Election due by June 15; credit is refundable | | New York | Yes (PTET) | Still highly valuable for NYC residents facing 3.876% NYC tax on top | | New Jersey | Yes | Mandatory for entities above a threshold | | Connecticut | Yes | Mandatory election structure | | Illinois | Yes | Still useful for owners above $40K in state taxes | | Virginia | Yes | Many owners below new SALT cap; re-evaluate | | Massachusetts | Yes | Flat 5% rate; most owners below new cap | | Wisconsin | Yes | Limited to pass-through income; complex |
Running the Numbers: When Does PTET Still Win?
The key question is whether the entity-level federal deduction for state taxes exceeds what the owner can deduct personally under the $40,400 cap.
Example 1: PTET is clearly still worth it
- New York City S-corp owner
- Annual state + city income tax: $95,000
- Federal rate: 37%
- MAGI: $750,000 (above phase-out, personal SALT cap reverts to $10,000)
- PTET benefit: ($95,000 − $10,000) × 37% = $31,450/year in federal tax savings
Example 2: PTET is borderline
- Virginia LLC owner
- Annual state income tax: $38,000
- Federal rate: 24%
- MAGI: $300,000 (below phase-out, personal SALT cap = $40,400)
- PTET benefit: ($38,000 − $38,000) × 24% = $0 — entire state tax is deductible personally
- In this case, PTET adds no federal benefit and only creates compliance cost
Example 3: PTET is mixed
- Illinois partnership
- Annual state income tax: $60,000
- Federal rate: 32%
- MAGI: $400,000 (personal SALT cap = $40,400)
- PTET benefit: ($60,000 − $40,400) × 32% = $6,272/year — may or may not exceed PTET compliance costs
Use the PTET vs. SALT Cap Election Calculator to enter your specific state, entity type, income, and owner details to see whether PTET is still advantageous for your situation.
Compliance Cost Is Part of the Equation
PTET elections add accounting complexity. Most CPA firms charge an additional fee to handle entity-level estimated payments, prepare the PTE return, and allocate credits to owners' returns. For smaller businesses, this compliance cost — often $500–$2,000+ per year — can eat into or exceed the federal tax savings.
If your annual PTET benefit is $1,500 and the incremental CPA cost is $1,200, the net benefit is $300. If those numbers flip for a reason (state audit risk, new credit mechanics, owner circumstances change), it may be worth revoking.
When to consult your CPA:
- Your income is near the $500,000 phase-out threshold
- You have multiple states with PTET elections
- Your entity income fluctuates significantly year to year
- You're evaluating an S-corp election for the first time
Action Items for 2026
- Run the calculator with your current income, state, and entity to see whether PTET still provides a net benefit in 2026
- Check your election deadline — most states require election by the first estimated payment date (often April 15 for a January 1 tax year)
- Review multi-owner situations — different owners may have different personal SALT situations, making a blanket entity election suboptimal for some of them
- Consider partial elections — some states allow partial or per-owner elections; check whether your state allows this if some owners benefit and some don't
Frequently Asked Questions
Can I revoke a PTET election I already made? Rules vary by state. New York allows revocation by a certain date; California's election is irrevocable once made. Check with your CPA before assuming you can change course mid-year.
Does the OBBBA phase-out apply to the SALT I'm deducting through PTET? No. The OBBBA phase-out applies to the personal itemized SALT deduction. Entity-level PTET payments are deducted as a business expense (not as SALT), so they are not subject to the $40,400 cap or the phase-out at all.
What if I take the standard deduction? Does PTET still help? Yes. The PTET benefit comes from the entity-level federal deduction, which reduces the entity's taxable income (and therefore your K-1 income) before it ever reaches your personal return. Whether you itemize or take the standard deduction doesn't affect the entity-level deduction.
Is PTET effective for sole proprietors? No. PTET elections apply to pass-through entities — S-corporations and partnerships — where there's a legal separation between the entity and its owners. Sole proprietors report all business income on Schedule C as personal income.