Definition
The pass-through entity tax election is a state-level workaround to the $10,000 federal cap on deducting state and local taxes.
How It Works
Most states now let a partnership or S-corporation pay state income tax at the entity level instead of passing it to owners' personal returns. Because the SALT cap applies to individuals rather than businesses, the entity deducts the full state tax as a business expense on the federal return, and the owner typically receives a state credit for their share.
Example
An S-corp owner in New York with $400,000 of business income has the company pay and deduct the state tax at the entity level, restoring a federal deduction that the $10,000 SALT cap would otherwise eliminate.
When It Works Best
It works best for owners of profitable pass-through businesses in high-tax states who are losing a meaningful deduction to the SALT cap.
Who It Applies To
Owners of partnerships and S-corporations in states that offer the election.
Watch-Outs
The rules vary widely by state, including election deadlines, whether it is annual or mandatory, and how the owner credit works, so the benefit depends on the specific state and entity.
