Overview
Pass-through entity (PTE) tax elections allow partnerships and S-Corporations to pay state income taxes at entity level. Entity-level state tax payments are fully deductible on federal return, bypassing $10,000 state and local tax (SALT) deduction cap on individual returns.
Available in most states. Election mechanics and requirements vary by state jurisdiction.
Requirements
Eligible Entity
Partnership or S-Corporation with income subject to state taxation. State must have enacted PTE election legislation.
State Tax Liability
State tax liability exceeding $10,000 SALT cap limitation. Strategy provides no benefit if state tax below cap.
Timely Election
Must file election by state deadline (varies by jurisdiction). Some states require quarterly estimated payments.
Tax Benefits
Example: Partnership with $66,000 state tax liability. Without PTE election, owners deduct only $10,000 on individual returns (losing $56,000 deduction). With PTE election, entity deducts full $66,000, saving owners approximately $21,000 in federal tax at 37% rate.
Federal tax savings calculated as: (State tax - $10K SALT cap) × Federal marginal tax rate.
State-level treatment varies. Some states provide offsetting credit to owners, others reduce taxable income. Net result typically neutral or slightly favorable at state level.
Implementation
State Research
Determine if state has enacted PTE election. Review state-specific election requirements, deadlines, and credit provisions.
Election Filing
File required election forms by state deadline. Some states require annual election, others allow one-time election continuing until revoked.
Tax Payments and Reporting
Make estimated entity-level tax payments per state requirements. File entity-level state return. Owners claim credit on individual returns where applicable. Coordinate with CPA for proper federal and state reporting.
Important Considerations
SALT cap currently scheduled to expire December 31, 2025. PTE election benefit may be eliminated or reduced after expiration depending on future legislation.
State-by-state analysis required. Election mechanics, payment requirements, and owner-level credit treatment vary significantly between jurisdictions.
Multi-state entities require careful analysis. Some states allow PTE election for state-source income only, others require all-or-nothing approach.
Coordinate with your CPA to evaluate state-specific rules, calculate projected benefit, and determine optimal election strategy for your entity and ownership structure.
Discuss Implementation
Contact us to evaluate PTE tax election for your entity.