Beat the SALT Cap: How PTET Lets Pass-Through Owners Reclaim State Tax Deductions

Brought to you by Henssler CPAs & Advisers

If you pay substantial state and local taxes (SALT) and feel the pain of the federal cap on SALT deductions, you may find relief if you are eligible to use the pass-through entity elective tax (PTET), a planning tool to overcome the limit on deducting state and local taxes as an itemized deduction on your tax return. Several states let certain partnerships, S corporations, and similar pass-through entities elect to pay state tax at the entity level so owners can claim a federal business deduction for those state taxes and bypass the SALT limitation.

This article explains how PTET works, using California as an example. Other states follow a similar concept, but tax rates, deadlines, and other issues may vary. Learn when this SALT workaround might help you, what to watch for, and practical steps to evaluate it for your situation.

OBBBA’s Increased SALT Limits: Even though the One Big Beautiful Bill Act temporarily increased the SALT limits, the PTET workaround still makes sense for many taxpayers. The 2025 OBBBA legislation raised the federal SALT deduction ceiling for years 2025 through 2029, and without any extending legislation, the cap reverts back to $10,000 in 2030.

In addition, the limit is reduced, phased down to $10,000, for high income taxpayers by 30% of their modified adjusted gross income (MAGI) that exceeds the threshold for the specific year. The following table shows the maximum SALT deduction and high-income phasedown for each tax year.

Salt Deduction

The increased deduction amounts do not eliminate the situations where PTET is beneficial:

• Taxpayers with SALT above $40,000 may still prefer PTET because shifting state tax to the entity can convert individual, limited itemized deductions into an entity deduction that fully reduces federal taxable income.
• Even taxpayers below the $40,000 ceiling can benefit from PTET if the entity deduction interacts favorably with other items (for example, reducing pass‑through income that otherwise triggers higher federal marginal rates, phaseouts, or net investment income tax exposure).
• PTET remains especially attractive where owners own multiple entities or where state tax credits and carryover rules make the economics favorable.

How PTET Works (The Basic Concept)

• The Election: Each year, the pass-through business (S-Corp, Partnership, or certain LLCs) decides if it wants to “opt-in” to this special tax. This must be done on a timely filed original tax return and is irrevocable for that year. Not all partners or shareholders of the business need to opt in for the other owners to participate.
• The Tax Rate: The business pays a tax on its “qualified net income”—basically, the share of profit belonging to the owners who agree to participate. In CA that tax is a flat 9.3%.
• The Federal Benefit: Because the business pays this tax, it counts as a business expense. This reduces the amount of profit reported on the participating owner’s federal K-1, effectively letting the participating partner or shareholder deduct the full state tax amount from their federal income.
  • The State Benefit: On the individual’s personal tax return, they get a nonrefundable credit equal to the tax the business already paid on their behalf. In California, if the credit is more than what the individual owes, the leftover amount can carry forward for up to five years.

Eligible Pass-through Entities: Eligible entities typically include S corporations, partnerships, and LLCs taxed as partnerships or S corps. Each state’s rules vary, but these entity types are the norm.

Ineligible situations generally include sole proprietorships, publicly traded partnerships, and certain ownership structures (check your state’s rules if an owner is itself a partnership or similar complex owner).

Not all pass-through entity owners have to opt in. An owner must consent to participate to receive the credit, but a subset of consenting owners can still allow the entity to make the election for those participants.

How PTET Stacks Up Given Recent Federal SALT Law Changes

• As mentioned previously the 2025 OBBBA legislation temporarily raises the federal SALT deduction cap for 2025–2029. Even with higher temporary caps, PTET can still be beneficial:
  • Taxpayers with SALT well above the temporary caps may still prefer PTET to convert the state tax burden into an entity deduction that fully reduces federal taxable income.
  • Even taxpayers below the temporary caps can benefit if the entity deduction interacts favorably with other tax items — for example, reducing pass-through income that would otherwise push the taxpayer into a higher tax bracket, cause phaseouts, or trigger net investment income tax or other surtaxes.
  • Owners of multiple entities, or those who benefit from state-specific credits and carryover rules, may find PTET especially attractive.

Bottom line, model both scenarios — itemizing with the applicable SALT cap vs. PTET to determine the better result for your specific facts.

Final Thoughts and Recommendations:

PTET is a powerful tool for many taxpayers facing SALT limits, but it’s not a one-size-fits-all solution. The temporary federal increases to the SALT cap through 2029 change the math for some taxpayers, so current-year modeling is essential.

If you want a basic model comparing PTET versus itemizing for your number, contact the Experts at Henssler Financial. We’d be glad to help:

• Experts Request Form
• Email: experts@henssler.com
• Phone: 770-429-9166