PTET 2026: State Pass-Through Entity Tax Election Guide

What is a PTET election?

A PTET election is a state-level choice that lets an eligible pass-through entity pay state income tax at the entity level instead of having that tax flow through to the owners' personal returns. The election was developed by states beginning in 2018 as a workaround to the Tax Cuts and Jobs Act's $10,000 cap on the federal deduction for state and local taxes on individual returns. By 2026, roughly three dozen states with a personal income tax have a PTET regime on the books[1].

The mechanical core: instead of an S-corporation reporting its income on K-1s and having the shareholders pay state tax on their pro-rata share via Form 1040 (where it is SALT-capped), the S-corp itself pays state tax on the income, deducts that payment as an ordinary business expense on the federal return (where there is no cap), and then the K-1 shows reduced flow-through income to the shareholder. Most states then issue the shareholder a credit on the state personal return for the entity-paid tax. The shareholder ends up paying approximately the same total state tax, but with the federal deduction restored[2].

Why does PTET save federal tax?

PTET works because the IRS blessed it. In November 2020, the IRS issued Notice 2020-75, which formally stated that state and local income taxes "imposed on and paid by" a partnership or S-corp are allowable as a deduction in computing the entity's non-separately-stated income or loss[3]. The Notice declined to recharacterize PTET as a disguised owner-level tax. With that blessing in place, every state with a personal income tax had cover to design and adopt a PTET, and most have.

The federal math: an owner in the top 37 percent federal bracket who pays $100,000 of state tax through PTET deducts that $100,000 as a business expense, saving $37,000 federally. The owner then takes a state credit for the $100,000 against their personal state liability; total state tax paid is the same as before.

Net federal saving: $37,000 on the $100,000 PTET payment, less whatever fraction of that $100,000 would have been deductible under the SALT cap (typically $10,000 max), so the marginal saving is on the $90,000 above the cap, or roughly $33,000 in this example. Real numbers depend on the owner's federal bracket and the relevant state's PTET rate.

2026 state-by-state PTET inventory

The status of each state's PTET regime as of May 2026 follows. Verify against the relevant department of revenue page before electing; several states have amended PTET provisions in the past two years, and at least one state has wound down its program. States without personal income tax (Alaska, Florida, Nevada, New Hampshire on most income, South Dakota, Tennessee, Texas, Washington, Wyoming) have no PTET to elect and are omitted.

Pennsylvania and the District of Columbia are the notable holdouts among states with a meaningful income tax. Verify against the state DOR site before electing because details (rate, timing, who counts as eligible owner) change[4].

How does the election work mechanically?

The election mechanics are state-specific in details but follow a common shape. The entity makes the election on a state-specific form, generally by the original or extended due date of the entity return. The entity then pays the state PTET on its own return, often at the top state individual rate applied to apportioned income. The entity deducts that PTET payment as an ordinary expense on its federal return (typically Form 1065 or 1120-S).

Owners receive a K-1 reflecting their share of entity income net of the PTET deduction, and a separate state statement showing their share of PTET paid, which they claim as a credit on their state personal return.

A few mechanics worth watching. Election timing matters: most states require the election by a specific date in the year (often by the original entity return due date, sometimes earlier with prepayment requirements). Missing the deadline forfeits the election for that tax year. Owner eligibility varies: most states require all owners to consent to the election; some require only a majority. A non-consenting owner generally drops out of the PTET in the states that allow partial elections. Estimated payments shift: the entity now owes quarterly estimated payments at the entity level on the PTET, separate from the owners' personal estimateds. Refundable vs. nonrefundable credit: refundable credits return excess to the owner; nonrefundable credits cap at the owner's state personal tax liability and excess is lost.

How does PTET interact with multi-state nexus?

For owners with single-state-only businesses, PTET is straightforward: elect, pay, take the credit. For owners with multi-state operations (e-commerce sellers with marketplace nexus across states, consulting firms with clients in multiple states, real estate investors with cross-state holdings), PTET gets more complicated and the wrong sequence can leak tax.

Resident-state credit for tax paid to other states. Every state with a personal income tax allows a credit on the resident's return for income tax paid to another state on income sourced there. PTET paid by an entity to a non-resident state generally generates a credit on the owner's resident-state return, just like personal income tax paid to that non-resident state would. But the mechanics of that credit calculation can shift: some states require the PTET to be paid by an entity at the entity level, then credited as "tax paid" on the owner's resident return; others treat it as a state-of-residence-only benefit and disallow the cross-state credit for entity-paid tax[5].

Apportionment fights. Multi-state PTET requires the entity to apportion its income across states using each state's apportionment formula (typically a sales-factor formula in 2026, with some states still using property-payroll-sales). PTET tax base in each state is the apportioned income; getting the apportionment wrong leaves either tax on the table or overpayment that has to be amended out.

When should you skip PTET?

PTET is not a universal win. The election has costs (administrative overhead, estimated-payment timing shifts, audit-trail complexity) and only delivers federal value above the SALT cap for itemizers. Three categories of owners should typically skip the election.

Owners taking the standard deduction. The SALT cap only matters if you itemize. Standard-deduction takers get no federal benefit from PTET. Most middle-income pass-through owners now take the standard deduction; for them PTET adds work without saving tax.

Owners under the $10,000 SALT cap. If your personal state tax plus property tax stays under $10,000 even at full income, you are not capped and PTET delivers no federal saving. This is most common for low-tax-state residents, or for high earners with primary residence in a state with low property taxes and a low effective income tax.

Single-state owners with simple ownership. The simpler the structure, the more administrative overhead is the swing factor. A single-owner S-corp in California with a $300,000 net might see $20,000-$30,000 of federal saving from PTET, which is meaningful. The same shape with $50,000 of net usually does not justify the extra return-prep cost.

PTET adoption failure modes

Bottom line

PTET is the cleanest SALT-cap workaround federal law currently allows, and it has been adopted by approximately three dozen states. For itemizing pass-through owners in high-tax states above the $10,000 SALT cap, the election typically saves several thousand to tens of thousands of dollars per year, depending on entity-level state tax. For owners outside that profile (standard deduction, low-tax state, under the cap), the election adds work without federal saving.

The 2026 mechanics are stable but the regulatory environment is not. The IRS Notice 2020-75 blessing has not been disturbed, and most state PTET regimes are mature. But the underlying SALT cap could move in either direction with federal legislation, and a few states have amended PTET rules in the past two years. Re-verify state status before each year's election deadline.

For your own decision, the modeling is straightforward: model the year both ways (with and without PTET) using actual numbers, weight by your federal marginal rate and your state's PTET rate, and decide. The election does not require multi-year commitment in most states; you can re-evaluate annually.

1. Tax Foundation, State Pass-Through Entity Tax (PTET) Tracker, current edition. taxfoundation.org. return
2. AICPA, State Pass-Through Entity Tax Implementation Matrix, updated for 2025-2026. AICPA member resource. return
3. Internal Revenue Service, Notice 2020-75 (Nov 9, 2020), Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes. irs.gov/pub/irs-drop/n-20-75. return
4. Each state's department of revenue PTET page is the primary source for state-specific mechanics. Examples: New York PTET, California PTET (FTB), New Jersey BAIT/PTET. return
5. Federation of Tax Administrators, State PTET Resident-Credit Coordination Matrix. taxadmin.org. return