What Is PTET? The Pass-Through Entity Tax Election Explained

The PTET election, also called the pass-through entity elective tax or PTE tax, exists because of one sentence in the tax code. IRC 164(b)(6) caps the state and local taxes an individual can deduct, but says the cap “shall not apply to ... taxes ... which are paid or accrued in carrying on a trade or business” (26 U.S.C. 164(b)(6)). A partnership or S corporation that pays its own state income tax is paying a business tax, and states built elective entity-level taxes to fit that sentence. This post covers the federal rule, what P.L. 119-21 did to the cap, who still comes out ahead, the effects on QBI and estimated payments, and how the election works in six states. What a pass-through entity is and how its income is normally taxed is in what is a pass-through entity.

The federal rule: Notice 2020-75

The IRS position is in Notice 2020-75. It defines a Specified Income Tax Payment as an amount a partnership or S corporation pays a state (or the District of Columbia) to satisfy an income tax imposed on the entity, and it says the definition applies “without regard to whether the imposition of and liability for the income tax is the result of an election by the entity” or whether the owners get a credit or other benefit for their share. Three consequences follow, all in section 3.02 of the notice:

• The entity deducts the payment in computing its taxable income for the year in which the payment is made.
• The payment is not a separately stated item on the K-1. It is “reflected in a partner's or an S corporation shareholder's distributive or pro-rata share of nonseparately stated income or loss.”
• The payment is not counted against the owner's SALT limitation.

The notice promised proposed regulations and said taxpayers may rely on it until they are issued. As of September 26, 2026 it is still the guidance in force: P.L. 119-21 rewrote the cap amounts in section 164(b)(7) and added nothing about entity-level taxes.

What P.L. 119-21 changed about the individual SALT cap

Before July 4, 2025 the cap was a flat $10,000 ($5,000 for married filing separately) and the paragraph that imposed it applied only to tax years beginning before January 1, 2026. The new law kept the cap, raised it, added an income phase-down, and set the amount back to $10,000 after 2029 (IRC 164(b)(7)):

Modified adjusted gross income here means AGI plus any amount excluded under sections 911, 931 or 933 (foreign earned income and possession income), so for most owners it is simply AGI. Two things did not change: the cap still applies only to individuals, and the trade-or-business exception above still stands. The PTET post on year-end planning covers the December payment; this one covers whether to elect at all.

Who still benefits from the election in 2026

• Owners above the phase-down. At $505,000 of modified AGI the 2026 cap starts to shrink, and it reaches the $10,000 floor at $606,333 (computed from the 30% formula). An owner there is back on the old cap, and the entity-level deduction is worth the full state tax.
• Owners whose state tax exceeds $40,400 anyway. A 9.3% California PTET on $600,000 of income is $55,800; a New York owner with $2 million of PTE taxable income pays $137,000. Even an owner under the threshold cannot deduct those amounts on Schedule A.
• Owners who take the standard deduction. For 2026 it is $32,200 on a joint return and $16,100 for a single filer (Rev. Proc. 2025-32). An owner who does not itemize gets no SALT deduction at all, but the entity deduction arrives through the K-1 regardless.
• Who gains little. An owner under $505,000 whose property and income taxes together fit inside $40,400 and who itemizes already deducts the state tax. For that owner the election mostly adds a QBI cost and state paperwork.

The owner-level credit, the QBI effect and estimated payments

The state credit. Every state on the table below hands the tax back to the owner in some form: a refundable credit (New York, New Jersey, Virginia), a nonrefundable credit with a carryover (California), or an exclusion of the income the entity was taxed on (Georgia). The states also add the federally deducted tax back for state purposes (the entity adds it back in California, New Jersey and Virginia; the owner does in New York), so the state side is a wash by design. The gain is federal.

QBI. Because the payment sits inside nonseparately stated income, it reduces qualified business income, which IRC 199A(c)(1) defines as “the net amount of qualified items of income, gain, deduction, and loss” of the business (26 U.S.C. 199A). An owner taking a 20% deduction on QBI therefore gives back up to 20% of the PTET. The thresholds, limits and the S corporation salary interaction are in the QBI deduction.

Estimated payments. The entity takes on a payment schedule of its own (see the table), the owner's state estimates fall by the credit, and the owner's federal estimates can fall because K-1 income is lower. The safe harbor math for the owner is in estimated tax safe harbor. Timing decides the federal year: the notice allows the deduction for the year the payment is made, so a payment in January belongs to the next return.

An illustration of the 2026 math

The state side nets to zero: the owner claims the credit for the $55,800 the entity paid, and the federal deduction is added back for state purposes as the state instructions require. The federal side is where the election earns its keep, and the QBI line is the cost most owners forget to subtract.

How the election works in six states

State rules change every year: rates move, election dates move, and some statutes carry expiration dates tied to the federal cap. Every fact below names the tax year it was checked for and comes from the state tax agency's own page or form instructions, opened September 26, 2026. Treat the table as a map, not a filing guide.

Three details from those sources are worth flagging. Virginia's statute, as described in the 2025 Form 502PTET instructions, covers taxable years beginning before January 1, 2027, so 2026 is the last year under current law unless the General Assembly extends it. Illinois went the other way: Bulletin FY 2026-15 says the expiration date for its PTE tax was removed by Public Act 104-0453. And California's FTB page explains that for 2026 to 2030 a missed June 15 payment no longer kills the election; it reduces the owners' credit by 12.5% of their share of the unpaid amount instead. Massachusetts is not on the table because its state page could not be opened for verification.

Deciding whether to elect

The election is annual in every state above. California's is irrevocable once made; New York's locks in on March 15, the first estimated payment date. The decision therefore belongs on the calendar in the year-round tax strategies list: New York must be in by March 15, California's first payment by June 15, and every state's December estimate before the federal year closes. Running the owner's modified AGI against the phase-down, the QBI cost against the state rate, and the credit mechanics against a nonresident owner's home-state rules is what Forward Tax Planning puts in writing with your CPA before the first deadline.

Sources: IRS, Notice 2020-75, forthcoming regulations regarding the deductibility of payments by partnerships and S corporations for certain state and local income taxes; 26 U.S.C. 164, taxes (164(b)(6) and (b)(7), as amended by P.L. 119-21); 26 U.S.C. 199A, qualified business income (199A(c)(1)); IRS, Rev. Proc. 2025-32, 2026 inflation adjustments (standard deduction); California Franchise Tax Board, Pass-through entity (PTE) elective tax (updated April 23, 2026); New York State Department of Taxation and Finance, Pass-through entity tax (PTET) (updated April 3, 2026); New York State Department of Taxation and Finance, Calculating the PTE taxable income, the PTET, and the credit; New York State Department of Taxation and Finance, PTET frequently asked questions; New Jersey Division of Taxation, Pass-Through Business Alternative Income Tax (PTE/BAIT) (updated April 16, 2026); New Jersey Division of Taxation, PTE/BAIT frequently asked questions; Illinois Department of Revenue, What is the Pass-through Entity (PTE) tax?; Illinois Department of Revenue, Informational Bulletin FY 2026-15 (December 2025); Illinois Department of Revenue, Informational Bulletin FY 2027-01 (July 2026); Virginia Department of Taxation, 2025 Form 502PTET instructions (Rev. 08/26); Virginia Department of Taxation, Pass-through entities; Virginia Department of Taxation, Elective pass-through entity tax guidelines; Georgia Department of Revenue, HB 149 pass-through entity tax FAQ; Georgia Department of Revenue, Corporate income and net worth tax. Figures and rules checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.