Pass-Through Entity Tax (PTET)

What Is the Pass-Through Entity Tax?

A pass-through entity generally does not pay federal corporate income tax. Instead, income, deductions, credits, and losses flow to its owners, who report their shares on individual returns. Common examples include partnerships, S corporations, limited liability companies taxed as partnerships, and sole proprietorships.

PTET changes where state income tax is paid. An eligible business elects, or in limited cases is required, to pay tax at the entity level. Owners then usually receive a state credit, exclusion, or similar benefit to prevent double taxation at the owner level. PTET preserves pass through taxation while shifting the payment to the business.

PTET is separate from obligations such as State Gross Receipts Taxes, franchise taxes, sales taxes, and payroll taxes.

Why PTET Exists and What Problem It Was Designed to Solve

RC §164 generally allows a state and local tax deduction for certain state and local income taxes. However, the Tax Cuts and Jobs Act imposed a federal limit on the amount individuals can deduct for specified state and local taxes. For 2025, the deduction is generally capped at $40,000, increasing to $40,400 in 2026 with annual inflation adjustments through 2029, before reverting to $10,000 after 2029.

PTET was developed as a SALT cap workaround. By imposing the tax at the partnership or S corporation level instead of the individual owner level, eligible state taxes may reduce the entity’s taxable income before it passes through to the owners, rather than being claimed as a capped individual state and local tax deduction. Connecticut enacted the first PTET regime in 2018, and more than 30 states later adopted versions.

How the Federal Deduction Works When a Business Pays PTET

When an eligible entity pays PTET, the expense generally reduces the business income reported to its owners. The PTET deduction is taken by the entity rather than claimed as an itemized deduction by each owner.

For example, if a partnership earns $1 million before PTET and pays $60,000 of qualifying entity-level tax, the partnership’s ordinary business income generally decreases to $940,000 before being allocated to the partners. Depending on the state’s PTET regime, the partners may also receive a credit, exclusion, or other tax benefit on their state income tax returns.

The result can affect estimated payments, basis, and, for some partnerships, self-employment income. International partnerships should separately coordinate PTET reporting with Schedules K-2 and K-3 when applicable.

Which States Have Enacted PTET and How the Rules Differ

As of 2025, many jurisdictions have PTET regimes, including California, Georgia, Illinois, Massachusetts, Michigan, New Jersey, New York, , North Carolina, Ohio, South Carolina, Virginia, Wisconsin, and many others.

The rules differ significantly:

• some states allow owner opt-outs, while many apply the election to all owners
• rates may be fixed, graduated, or tied to individual or corporate rates
• forms and filing methods vary, including online-only systems in some jurisdictions such as New York

The Planning Considerations Before Electing Into PTET

PTET often helps when owners would otherwise lose a deduction because of the SALT cap and the state provides a full or substantial owner-level credit or exclusion [2].

It may be less favorable when:

• owners cannot fully use the state credit;
• resident-credit rules in another state are limited or uncertain;
• the election binds all owners, including those who would prefer not to participate;
• timing rules, estimated payments, or refund mechanics create cash-flow issues

FAQ

Does every owner in the entity have to agree before a PTET election can be made?

Not always. Some states make the election binding on all owners, while others permit opt-outs or participation limits. The answer depends on the jurisdiction’s statute, election mechanics, and governing documents authorizing who may elect for the entity.

Can a non-resident owner benefit from a PTET election if they live in a different state?

Yes, but the result depends on both states. The source state may provide a PTET credit, while the owner’s resident state may allow a credit for taxes paid elsewhere. Mismatched rules can reduce or eliminate the expected tax benefit entirely.

Is the PTET credit refundable if it exceeds the owner’s state tax liability?

It depends on the state. Some jurisdictions refund excess credits, while others permit carryforwards or limit the credit to current-year liability. Businesses should confirm the applicable rule before assuming that every owner can fully use the available PTET credit amount.

Can a business make a PTET election retroactively for a prior tax year?

Usually not, although some states permit late elections, amended filings, or limited relief under specific procedures. Election deadlines vary widely. A business should review the applicable statute, administrative guidance, and filing instructions before attempting a retroactive PTET election for a prior year.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, Partner and Co-Leader of Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.