The SALT cap under TCJA limited individual deductions for state and local taxes to $10,000 per year. OBBBA P.L. 119-21 raises that to $40,000 for 2025 and $40,400 for 2026 (half those amounts for married filing separately), increasing 1% annually through 2029, with a phase-down above $500,000 MAGI ($505,000 for 2026) and reversion to $10,000 after 2029. But for pass-through business owners - partners, S-corp shareholders - there is a separate workaround that predates and survives any SALT cap: the pass-through entity tax (PTET) election. Under IRS Notice 2020-75, a state-level tax paid by the entity is a fully deductible business expense on the federal return, bypassing the individual SALT cap entirely. If your state has a PTET and your partnership or S-corp has not evaluated an election, this is likely a missed deduction.
Step 1: Partnership or S-corp elects into state PTET and pays state income tax at the entity level.
Step 2: Entity deducts the PTET as a business expense on the federal return - reducing K-1 ordinary income to partners/shareholders. Not limited by the individual §164(b)(6) SALT cap because it is the entity paying, not the individual.
Step 3: Partners/shareholders claim a credit on their state return for their share of PTET paid. The state tax is not paid twice - the individual credit offsets the entity's state payment. Net result: full federal deduction, no SALT cap, state-level wash.
TCJA's §164(b)(6) capped individual deductions for state and local taxes at $10,000 (since 2018). It said nothing about entity-level state taxes. IRS Notice 2020-75 clarified that a state-imposed entity-level income tax on a partnership or S-corp is deductible at the entity level and is not an individual SALT deduction subject to §164(b)(6). The entity's deduction flows through the K-1 and reduces each owner's ordinary income without touching that owner's individual SALT cap. Over 43 states have now enacted PTET regimes to give their residents this benefit.
OBBBA P.L. 119-21 raised the individual SALT deduction cap from $10,000 to $40,000 for 2025 and $40,400 for 2026, reduced by 30% of MAGI over $500,000 for 2025 ($505,000 for 2026) but not below $10,000. The PTET benefit is most pronounced for high-income pass-through owners who (a) have state tax bills far exceeding the cap or (b) have MAGI of roughly $600,000 or more for 2025 ($606,333 or more for 2026), where the cap is reduced to the $10,000 floor. For a New York City partner earning $2M of K-1 income, state and city taxes can exceed $200,000 - the individual SALT cap covers almost none of it. The PTET election converts that $200,000+ to a fully deductible entity expense.
| State | Entities Eligible | Rate | Election Timing | Key Notes |
|---|---|---|---|---|
| New York | Partnerships, S-corps (not SMLLCs) | 6.85% - 10.9% on entity income | Annual election by March 15 of the tax year (opt in on or after January 1) | Mandatory for all owners once elected; resident credit equals PTET paid; NYC has separate PTET |
| California | Partnerships, multi-member LLCs, S-corps | 9.3% flat on qualified net income | Initial payment due June 15 of the tax year (greater of $1,000 or 50% of prior-year PTE tax); for 2026-2030, a missed or short payment reduces the credit by 12.5% of the unpaid amount instead of forfeiting the election | Non-refundable credit; carries forward 5 years; requires June 15 cash outlay mid-year |
| New Jersey | Partnerships, S-corps | Graduated 5.675% - 10.9% | Annual election | 100% refundable credit to individual owners; particularly strong PTET benefit |
| Illinois | Partnerships, S-corps | 4.95% | Annual election | Non-refundable credit; based on distributable share |
| Connecticut | Partnerships, LLCs, S-corps - elective from 2024 (mandatory 2018-2023) | 6.99% | Annual election on Form CT-1065/CT-1120SI (optional; cannot be amended or revoked once made) | First state PTET (enacted 2018); applied automatically to all CT partnerships and S-corps before 2024 |
| Massachusetts | Partnerships, S-corps | 5% | Annual election | Credit on individual return; covers both MA residents and non-residents with MA-source income |
The election is not universally beneficial. It typically does not make sense when owners have large operating losses that eliminate federal taxable income (a deduction you cannot use is worthless); when non-resident partners in multiple states face stacking issues where the credit mechanism is incomplete; when the entity has C-corp partners who cannot use the individual credit; or when the entity is a single-member LLC treated as a disregarded entity (not eligible in most states).