State income tax used to be fully deductible on your federal return — until 2018, when Congress capped the state-and-local-tax (SALT) deduction at $10,000. For owners of pass-through businesses in high-tax states, that cap turned into a real annual cost. Two developments now change the math: a temporarily higher federal cap, and a state-level workaround nearly every pass-through owner can use regardless of the federal number.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
The SALT Cap, Post-OBBBA
The One Big Beautiful Bill Act (OBBBA), signed in 2025, temporarily raised the SALT deduction cap from $10,000 to $40,000 for the 2025 tax year, rising to $40,400 in 2026 and by roughly one percent a year through 2029 before reverting to $10,000 in 2030. The higher cap phases down — but never below $10,000 — for taxpayers whose modified adjusted gross income exceeds $500,000 in 2025 (adjusted upward in later years); above that threshold, the increased amount is reduced by 30 percent of the excess income.
That is real relief for many owners who itemize, but it is temporary, income-limited, and still a cap. It applies to the SALT you pay personally — as an individual taxpayer — not to what your business pays. That distinction is exactly what the pass-through entity tax exploits.
What the Pass-Through Entity Tax (PTET) Actually Does
More than 30 states now offer a PTET election. In a state that offers it, a partnership or S corporation can elect to pay state income tax directly at the entity level, on behalf of its owners, instead of having each owner pay it personally on their individual return. Because it is a tax paid by the business, it is deductible as an ordinary business expense on the entity’s federal return — in full, with no $10,000 or $40,000 ceiling at all. Owners then typically receive a state tax credit or subtraction on their personal return to avoid paying the same state tax twice.
The net effect: state tax that used to be trapped behind the personal SALT cap gets deducted in full at the entity level instead, lowering the pass-through income that flows to the owners’ K-1s. OBBBA considered limiting this workaround — earlier drafts of the bill would have restricted it — but the final law left PTET elections untouched, so the strategy remains fully available today.
Who Benefits Most
PTET is most valuable for owners of profitable S corporations and multi-member LLCs taxed as partnerships in states with meaningful income tax rates, especially those whose personal SALT deduction is otherwise capped or phased out entirely by the OBBBA income limits. Sole proprietors and single-member LLCs that have not elected corporate or partnership tax treatment generally cannot use a PTET election, since it is only available to entities that file their own state return.
The Mechanics Owners Should Know
Every state that offers PTET writes its own rules, and the details matter. States differ on the election deadline (some require it by the original due date of the return, others allow it with an extension), whether estimated PTET payments are required during the year, the credit mechanism used to offset the owner’s personal liability, and how nonresident owners are treated. Missing an election deadline generally means waiting until the following tax year to benefit — there is usually no way to make it retroactive.
There are also nuances at the federal level: the IRS has blessed the general PTET structure, but cash-flow timing (the entity pays the tax, which reduces cash available for distributions) and the interaction with the entity’s own estimated tax payments both need to be planned for, not discovered in April.
PTET and the Higher SALT Cap — Use Both, Don’t Choose
PTET and the OBBBA’s temporarily higher personal SALT cap are not either-or. An owner can benefit from the entity-level PTET deduction on business income and still claim up to the personal cap on other state and local taxes paid individually, such as property tax or tax on non-pass-through income. For owners near or above the $500,000 MAGI phase-down threshold, PTET often becomes the primary lever, since the personal cap shrinks back toward $10,000 exactly for the taxpayers who would benefit most from it.
How VarStan Helps
Deciding whether to make a PTET election — and executing it correctly — touches your entity’s tax return, your personal return, and often quarterly estimated payments, all against state-specific deadlines that do not wait for tax season. As a CPA-led firm, we model the PTET election against your specific state, income level, and ownership structure, handle the election and payment calendar, and make sure the credit actually lands correctly on your personal return. If you own a profitable S corp or partnership and have not looked at PTET, it is worth a conversation before your next filing deadline.
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