Pass-Through Entity Tax After OBBBA: Still Worth the Trouble?

Jan 13

(And Why the Answer Is Often “It Depends”)

Be sure to read until the end for a trivia question!

This is the first of a two-part series on the Pass-Through Entity Tax (PTET).

Today, we’ll focus on how the PTET can still save you money, even after the OBBBA relaxed some of the restrictions on deducting state and local taxes. In next week’s post, we’ll look at the downsides — including situations where the PTET can actually cost you more than it saves.

Even though the SALT deduction rules are more generous than they were a few years ago, limitations are still very much in effect. We’ll also look at why deducting state taxes above the line (via the PTET) can be more valuable than deducting them below the line on Schedule A.

First, a Quick Refresher: What Is the PTET?

The Pass-Through Entity Tax is an election to pay state income taxes at the business-entity level, rather than on your personal tax return.

Under the normal rules:

Income from an S corporation or partnership “passes through” to the owners
The owners pay state income tax personally
The deduction for those taxes is limited under the SALT rules

After the Tax Cuts and Jobs Act imposed strict SALT deduction limits, states began offering the PTET as a workaround. Instead of the owner deducting state taxes personally, the business pays the tax, and the deduction occurs on the business return.

As of now, 36 states have enacted some version of a PTET.

Importantly:

You need a separate business entity (partnership or S corporation)
This is one of the potential benefits of making an S-corp election
Sole proprietors generally can’t use this strategy

How to Determine Whether the PTET Will Save You Money

The PTET is not automatically good or bad. It’s a math problem — and a timing problem.

Here are the main questions I walk through with clients.

1. Will the PTET Allow You to Deduct More State and Local Taxes?

This is the most obvious benefit — but it’s also the easiest one to miscalculate.

SALT limits still matter

The current SALT cap is $40,000
It increases to $40,400 next year — a 1% bump that is below inflation, meaning more taxpayers will run into it over time
If your income is >$500,000 ($250,000 if married and filing separately), your SALT cap is even lower. Once it exceeds $600,000 ($300,000 if married and filing separately), you’re stuck with the old cap of $10,000 ($5,000 if married and filing separately).

Also remember:

The SALT cap includes property taxes
It includes state and local income taxes
It includes estimated payments and balance-due payments, based on when they were paid, not which tax year they apply to

What you should actually add up

For 2025, you need to look at all of the following paid between 1/1/25 and 12/31/25:

A. Estimated payments for the 2024 return paid after 12/31/24
B. Balance-due payment made with the 2024 return
C. State tax withholdings during 2025
D. Estimated payments for 2025 made during 2025
E. Real estate property taxes paid or escrowed during 2025
F. Other property taxes (e.g., vehicle ad valorem taxes)
G. Local income taxes (items A–D applied at the city or local level)

You can see how timing alone (December vs January payments) can cause this number to swing significantly from one year to the next.

2. Are You Itemizing — or Taking the Standard Deduction?

This is where the PTET often helps in non-obvious ways.

If you don’t itemize

If you don’t have a mortgage, there’s a good chance you’re taking the standard deduction
Without the PTET, you may be deducting zero state taxes
With the PTET, you may be deducting some state taxes at the business level

That alone can justify the election. This is one of the most common PTET “wins” I see in practice.

If you barely itemize

Even if you itemize, the PTET can still help.

Example:

Itemized deductions: $33,000
Standard deduction: $31,500
Included in itemized deductions: $7,000 of SALT

Now suppose:

You pay $3,000 of PTET during the year
You reduce personal estimated payments by $3,000

Result:

You now take the standard deduction ($31,500) instead of itemizing
You also get a $3,000 deduction on the business return

Net effect: you come out ahead.

3. Is an Above-the-Line Deduction More Valuable Than a Below-the-Line One?

This is often a major reason the PTET works.

Both itemized deductions and the PTET reduce taxable income.
But only the PTET reduces Adjusted Gross Income (AGI).

Why does that matter?

Many credits and deductions phase out based on AGI
(child tax credit, education credits, etc.)
Student loan payments are often based on AGI
Medicare IRMAA surcharges use AGI
Patient assistance programs and other benefits use AGI
AGI is Line 11 — the number everyone seems to care about

Reducing AGI can have downstream benefits that don’t show up immediately in the tax calculation.

4. Timing Still Matters (A Lot)

Just like personal estimated payments, PTET payments are:

Deducted in the year they’re paid
Not the year the tax liability applies to

Example:

Payment applied to 2025 state taxes
Paid in Spring 2026
Deducted on the 2026 federal return

This creates mismatches that can work for or against you depending on:

Income levels
SALT limits
Whether you’re itemizing
AGI-based phaseouts

The PTET works best when it’s planned in advance, not retrofitted after the fact.

Coming Up in Part 2:

Even with all of these potential benefits, the PTET is not a slam dunk.

In Part 2, I’ll cover:

Refund mismatches and cash-flow issues
Multi-state complications
Why some taxpayers end up paying more, not less
Important deadlines some states impose

TaxSmart Takeaway

The Pass-Through Entity Tax is not a loophole — it’s a timing and structure decision.

It can:

Allow you to deduct more state taxes
Reduce AGI instead of just taxable income
Turn a near-miss itemizer into a clear winner

But it requires:

Careful tracking
Intentional payment timing
A willingness to look beyond the current year

In Part 2, we’ll talk about why getting this wrong can be expensive — and how to avoid the most common traps.

Special Trivia Question!

In May 2018, which state became the first to enact a Pass-Through-Entity Tax?

A. California
B. New York
C. New Jersey
D. Connecticut
E. Alaska

Click here for the answer!

Logan Foltz