Definition
A pass-through entity tax is a state-level tax that a partnership or S-corporation can elect to pay at the entity level to work around the federal SALT cap.
How It Works
The entity pays state income tax directly and deducts it as a business expense on the federal return, sidestepping the $10,000 individual SALT cap. Owners typically receive a state credit or income exclusion for their share.
Example
A partnership in a high-tax state elects to pay state tax at the entity level, preserving a federal deduction its owners would otherwise lose to the SALT cap.
When It Works Best
It works best for profitable pass-through businesses in high-tax states.
Who It Applies To
Partnerships and S-corporations in states offering the election.
Watch-Outs
PTE elections are state-specific and can interact with the individual SALT deduction cap. For 2026, the individual SALT cap is $40,400 but phases down above $505,000 modified AGI and cannot fall below the $10,000 floor.
