State pass-through entity tax election
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The federal government limits how much state and local tax you can deduct on your personal return. Most states with an income tax offer owners of S corps and partnerships a way around it: the company can elect to pay the owners' state income tax itself, often called a pass-through entity tax, or PTET.
The company deducts that tax on its federal return, where the limit doesn't apply, and the owners get a credit (or an exclusion) on their own state returns for the tax already paid. The result is a federal deduction that would otherwise be lost. Each state names it differently: North Carolina calls it a taxed pass-through entity, California an elective tax, New York a PTET.
How it works
Most states with an income tax let an S corp or partnership pay the owners’ state income tax itself. The company deducts it on the federal return, which gets around the federal limit on deducting state taxes. The owners get a credit on their own state return.
What makes it hold up
- The election made each year on the company’s state return
- Estimated payments made by the company
- The credit carried to each owner’s state return
Risks
Low. It’s worth less if your state taxes aren’t limited on your federal return, or if you take the standard deduction anyway.
Questions to ask your CPA
- Does my state offer the election, and is it worth it this year?
- Are the company’s state estimates on track?
- If the company is in another state from where I live, does my home state give a credit for it?
Common questions
Does my state offer it?
For 2026, 37 of the 41 states with an income tax offer it, including Maine, whose election starts in 2026. Delaware, North Dakota, Pennsylvania, Vermont and the District of Columbia don't. The nine states with no tax on wages (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming) have nothing to elect. The rules and deadlines differ by state, so your CPA should confirm yours.
Who can make the election?
Usually S corps and partnerships, including LLCs taxed as either. Single-member LLCs taxed as sole proprietorships generally can't. Many states make it a yearly choice on the company's state return, and some require it by a set date during the year.
Is it still worth it now that the SALT cap is higher?
Often yes. The 2025 tax law raised the federal cap to $40,000, rising slightly each year, but it shrinks back toward $10,000 for incomes above about $500,000. Owners above that range, and owners whose property and other state taxes already fill the cap, still benefit.
What if my company is in a different state than where I live?
The company pays the tax to the state where it does business, and your home state usually gives you a credit for tax paid to another state. Not every state credits another state's pass-through tax the same way, so this is one to work through with your CPA before electing.
When is it not worth it?
If your state taxes aren't limited on your federal return anyway, or you take the standard deduction, the election adds little. It also means the company has to make estimated payments for the owners, which takes cash out earlier.
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Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.