Pass-Through Entity Tax (PTET): The SALT Cap Workaround

How it works

A state can let a partnership or an S corporation elect to pay its income tax at the entity level instead of passing the liability through to owners. The entity deducts that payment as a state and local tax under IRC sec. 164(a), an above-the-line federal deduction with no dollar cap. The owner then gets a state tax credit (most states) or a state income exclusion (a minority, Wisconsin among them) that keeps the income from being taxed twice at the state level.

The federal blessing is IRS Notice 2020-75, issued November 9, 2020. It defines a Specified Income Tax Payment and holds that state and local income taxes imposed on and paid by a partnership or an S corporation on its income are deductible by the entity in computing its non-separately stated taxable income, for the year of payment. That design does two things: the deduction lands inside ordinary business income rather than as a separately stated item passed to the K-1, so it never touches the owner's own itemized SALT cap, and it sits inside that same ordinary-income figure QBI is computed from, so it reduces QBI dollar for dollar, trimming the owner's Section 199A deduction by roughly 20% of the amount paid whenever the wage-and-property limit is not already binding. Mandatory or elective makes no difference to that under Notice 2020-75's own definition; Connecticut ran a mandatory version from 2018 through 2023 under the identical rule.

The cap this is working around

IRC sec. 164(b)(6) caps an individual's aggregate SALT deduction at an "applicable limitation amount," and a new paragraph, sec. 164(b)(7), added by the One Big Beautiful Bill Act (OBBBA, Pub. L. 119-21, sec. 70120, signed July 4, 2025), sets that amount at $40,000 for 2025 and $40,400 for 2026, rising one percent a year through 2029, reduced (never below a $10,000 floor, $5,000 married filing separately) by 30% of MAGI above a $500,000 threshold for 2025 ($505,000 for 2026, half for MFS), reverting to the original $10,000 ($5,000 MFS) TCJA figure after 2029.

The House-passed OBBBA (May 22, 2025) would have barred SSTBs, and in some drafts investment-type pass-throughs, from the PTET deduction starting in 2026. The Senate stripped that during reconciliation: enacted sec. 164(b)(6) and (b)(7) carry no PTET or SSTB restriction at all, so an SSTB such as a CPA practice or a law firm can use PTET like any other pass-through under current law. Whether that SSTB's own owner still gets a Section 199A deduction is separate: SSTB status alone can eliminate it above the income phase-out regardless of PTET.

What this is worth in Florida

Florida imposes no individual income tax. PTET's entire value proposition is converting state income tax into a federal deduction, and if there is no state income tax on the income in question, there is nothing to convert. A Florida-resident owner of a Florida-only operating business gets zero benefit from a PTET election, full stop, and I would not recommend it to that client. This is for the Florida resident with K-1 income, rental income, or an operating entity sourced to a state that actually taxes it: a second office, remote employees, a portfolio-company allocation, or a rental property elsewhere. As of 2025, roughly three dozen states plus New York City have enacted some form of PTET regime. The states with no individual income tax at all, Florida, Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, have no PTET regime because none is needed.

Who this applies to

• Entity type is the hard gate. Only an entity taxed as a partnership or an S corporation can generate a deductible Specified Income Tax Payment. A sole proprietorship or a disregarded single-member LLC cannot elect, because there is no taxpayer separate from the owner to make an entity-level payment. Restructuring into a multi-member LLC, or a valid S election, is a prerequisite here, not a detail.
• A C corporation does not need this. It already deducts state income tax at the entity level with no SALT cap problem, since sec. 164(b)(6) caps only individual itemized deductions.
• The state has to have enacted its own PTET statute. There is no federal PTET. The rate, the deadline, any prepayment, and the credit-versus-exclusion choice are all created by the taxing state, not the Internal Revenue Code.
• The owner has to have income actually taxed by that state. An owner whose only nexus is Florida-source income has no state income tax to shift and gets nothing from electing PTET.
• Owner consent is often required, and it is not automatic. California and Wisconsin, among others, condition the election on consent from owners holding a majority of capital, profits, or shares. A non-consenting minority owner is left out of the entity's qualified net income and gets no state-side credit or exclusion, even though the entity-level federal deduction, and the QBI reduction it causes, still applies to the whole entity's income.

What it requires

Every state where the entity has income-tax nexus needs its own annual check: whether it has enacted a PTET regime, its current rate, and whether the owner-level mechanism is a credit or an exclusion. Mechanics vary enough that a multi-state client needs a state-by-state review every year, not a carried-over assumption. Four representative states show the range:

Timing is its own requirement: Notice 2020-75 deducts the payment in the year the entity actually pays it, not the year the tax accrues, so an accrual-method entity is on a cash basis for this one deduction. A January payment is deducted in that following year, which turns the last quarterly state estimate into a real decision: pay before December 31 to pull the deduction into the current year, or let it slip a full year.

A state's "qualified net income" is also its own defined term, not automatically identical to federal ordinary income. Several states fold sec. 707(c) guaranteed payments for services into the PTET base though those same payments are excluded from QBI federally under sec. 199A(c)(4)(B); many look through only one tier of ownership or not at all; and California explicitly includes fiduciaries and trusts subject to its own income tax as qualifying owners, a treatment not uniform elsewhere.

What you need to document

The election itself, dated to that state's own calendar

Every state's election, deadline, and any required prepayment run independently of the federal return and of each other. Missing a state's window generally forfeits that year's benefit; most states carry nothing resembling federal-style late-election relief.

Owner consent, filed with the election itself

Where a state conditions its election on majority consent, the record needs to show which owners' shares were actually included in the qualified net income base.

The state's own base, reconciled to the federal K-1

Computing a state's base by analogy to the federal K-1, without checking that state's own definition of guaranteed payments and tiered ownership, is a common preparer error and a real audit exposure point.

Proof of exactly when the entity paid

Bank records tied to the state's own estimated-payment schedule: a December 31 payment and a January 2 payment of the identical amount land in different federal tax years.

Reasonable compensation, supported on its own

PTET's federal benefit and the QBI reduction it causes both move with officer wages, so an owner who is also managing salary to influence the QBI deduction needs the reasonable-compensation figure supported independently of either optimization.

Where it goes wrong

PTET's federal deductibility does not rest on a shaky reading of the Code. The exposure is calendar and consent risk, multiplied by however many states the entity touches.

• A missed election window usually has no relief. New York's March 15 deadline is absolute. Missing California's June 15 prepayment invalidated the entire year's election before 2026; now it costs a credit reduction of 12.5% of each owner's share of the unpaid amount, which is proportional to the shortfall rather than a flat haircut on the credit.
• Timing mistakes shift a year, or duplicate a payment. Missing a state's quarterly PTET schedule can trigger a state underpayment penalty on its own, and a common first-year mistake is failing to reduce the owner's personal state estimates once the entity starts paying that liability directly, which pays the same state tax twice.
• Credit and exclusion states do not interact the same way, so an owner with income in both needs each modeled separately; assuming they behave interchangeably because both are called PTET is a planning error, not just a compliance one.
• The federal authority is a Notice, not a finished regulation. Treasury has never finalized the proposed regulations Notice 2020-75 promised, and no further guidance has issued since 2020, a legitimate, if low-probability, durability risk, not a reason to avoid the strategy.
• The favorable law is not guaranteed to stay that way. Enacted law carries no PTET or SSTB restriction today, but the House already tried to add one once, and several states enacted PTET with a sunset date. Both are worth re-checking every filing season rather than treated as permanently settled.

The nonresident-owner myth

The commonly repeated version of the Florida angle says the Florida owner pays another state's tax through the entity but has no home-state return to claim a credit on, so ends up worse off. Worked through the mechanics of California, New York, Connecticut, and Wisconsin above, that is not quite right, and it is not a real trap for a Florida resident specifically. In every regime above, the credit or exclusion applies against the owner's liability to the taxing state itself, through the nonresident return that owner already has to file there regardless of PTET. A Florida, a New York, and a Texas resident who are all nonresident owners of the same California S corporation get the identical California credit against the identical nonresident liability; none of them needed a home-state return for it.

The real mismatch is different: some states' own resident-credit rules deny a credit to a resident whose home state does not treat entity-paid PTET as tax paid by the individual, a problem for a resident of another taxable state, not for Florida, which has no return that would ever need that credit. If anything, Florida residency removes this category of friction entirely. The traps that do apply regardless of residency are different: a state crediting partnership PTET fully but S-corp PTET only partially, or the reverse; a nonrefundable credit that overshoots a low-income year's actual liability, with no cash refund and only a carryforward, confirmed state by state; and procedural traps like New York's composite-return exclusion above. The benefit is real, not diminished by Florida residency, but entirely federal: an uncapped entity deduction in place of a capped, phased-down itemized one, since Florida was never taxing this income either way.

A situation where this comes up

The version I see is a Florida-resident owner of an S corporation or a partnership whose income is not entirely Florida-sourced: a remote services business with clients or an office in a state that taxes it, a rental property held elsewhere, or a K-1 allocation from a multi-state operating company. That state's tax is already getting paid somehow, through a composite return or the owner's own nonresident filing. PTET does not create a new tax; it changes who pays it and how the payment gets deducted.

What usually has to change is the tracking, not the business. There is often no per-state election calendar, no record of which owners actually consented, and no reconciliation between a state's qualified net income and what the entity's own K-1 reports, because none of that felt necessary before the entity had a reason to make an affirmative annual election, on that state's own calendar, in every state that taxes it.

The version that worries me is the owner with income in more than one PTET state who assumes the mechanics are the same everywhere: the same deadline, the same credit treatment, the same pass-through past a tiered structure. They are not, and a plan built on that assumption produces exactly the base mismatches and consent gaps described above.