The 3-step compression

  1. TCJA caps SALT deduction at $10,000 (2017). Owners of pass-through entities lose the federal deduction for the bulk of their state income tax. IRC §164(b)(6) — Limitation on individual deductions for state and local taxes (the TCJA SALT cap)
  2. IRS Notice 2020-75 (November 2020). Treasury / IRS confirms that state taxes paid by a partnership or S-corp at the entity level are deductible at the entity level — they do not pass through to the owner subject to the $10K cap. IRS Notice 2020-75 — Federal deduction blessing for entity-paid state PTET
  3. States enact PTET regimes (2020–present). ≈36 states + NYC pass legislation letting entities elect to pay state tax at the entity level, with owners receiving a state-level credit. PTETmap tracks each state's statute, deadline, rate, owner credit treatment, and composite-return interaction.

Who benefits

The mechanic is only useful when:

  • You receive K-1 income from an S-corp, partnership, or LLC taxed as either
  • Your federal marginal bracket is 32% or higher (≈$200K+ taxable for single filers, ≈$400K+ joint)
  • Your state income tax exceeds the SALT cap (post-OBBBA: $40K joint / $10K above the $500K MAGI phaseout)
  • Your state has enacted a PTET regime — see the 50-state grid

Who does NOT benefit

  • Sole proprietors filing Schedule C (no entity to pay tax at the entity level)
  • Single-member LLCs disregarded for federal purposes (in most states)
  • Publicly-traded partnerships
  • Owners in states with no individual income tax (FL, TX, NV, WA, SD, WY, AK, TN) — see No PTET regime
  • Owners whose federal bracket is so low that the §199A QBI offset eats the SALT-arbitrage benefit

The four moving parts on every election

  1. Election deadline. Varies wildly by state — CA prepayment due June 15, NY annual election due March 15, IL due-date-of-return + extension. Miss the deadline, lose the election for that tax year. See your state page.
  2. Entity-level rate. Some states use a flat rate (CA 9.3%, IL 4.95%, MA 5%); others use graduated brackets (NY 6.85%–10.90%, NJ 5.675%–10.9%).
  3. Owner credit treatment. Refundable (NY, NJ, IL, MA), partial-refundable with reduction-for-unpaid-share (CA), non-refundable, or carry-forward-only.
  4. Composite-return interaction. Some states force the entity out of composite filing when PTET is elected; others let PTET stack on top of composite. See composite vs PTET.

What about §199A QBI?

The 20% Qualified Business Income deduction under IRC §199A — Qualified Business Income (QBI) deduction (20% deduction) is computed on QBI after deducting state taxes paid at the entity level. When the entity pays PTET, the QBI base shrinks proportionally, partially offsetting the SALT-arbitrage benefit. The picker subtracts the QBI offset before reporting net benefit — see methodology.

What about OBBBA July 2025?

The One Big Beautiful Bill (signed July 2025) raised the SALT cap to ~$40,000 joint with a $500,000 MAGI phaseout to a $10,000 floor for tax years 2025–2029; the cap reverts to $10,000 in 2030. PTET workaround was explicitly preserved by OBBBA. For high-bracket pass-through owners above the phaseout (and almost everyone hitting PTET-level state taxes), the workaround economics still hold. See SALT cap explained.

Sources

See complete citation manifest. Federal anchors:

History of the state enactment wave (2018–2024)

Connecticut was the first jurisdiction to enact a workaround statute, not a true elective PTET. Public Act 18-49, signed by Governor Malloy on May 31, 2018, imposed a mandatory 6.99% entity-level income tax on pass-throughs sourced to Connecticut and granted resident partners and S-corp shareholders a corresponding credit. The Connecticut design predated Notice 2020-75 by more than two years and was the laboratory the rest of the country watched.

Wisconsin (Act 368 of 2017, effective for tax years beginning on or after January 1, 2018, for S-corps and 2019 for partnerships), Oklahoma (HB 2665, 2019), Louisiana (Act 442, 2019), Rhode Island (2019), and New Jersey (the BAIT, P.L. 2019, c. 320, effective tax year 2020) followed during the 2018–2020 ambiguity window. The taxpayer who claimed PTET treatment in those years took the position that the entity-level deduction was good under longstanding partnership-aggregate principles. The IRS never publicly disputed the position pre-Notice — but practitioners advised disclosing the position on Form 8275 and reserving for the contingency.

IRS Notice 2020-75 (November 9, 2020) collapsed the uncertainty. Calendar year 2021 saw approximately twenty additional enactments, including New York (Article 24-A, enacted in the FY 2021–22 budget, S.2509-C/A.3009-C), California (A.B. 150, effective January 1, 2021), Illinois (P.A. 102-0658, the Investment in Working Families Act), and Massachusetts (Chapter 63D, enacted September 2021 over a gubernatorial veto). By the close of the 2023 legislative cycle approximately thirty-six states plus New York City had operative workaround regimes; Pennsylvania, Maine, North Dakota, and Vermont remained the principal holdouts among states with material individual income taxes. The current 50-state grid on this site tracks each enactment, sunset, and amendment.

[Verify state-count totals at each annual content review — counts of 35–36 are reported across AICPA, Tax Foundation, and Bloomberg Tax sources but each tracks borderline regimes (NM, KS, VT) differently.]

Why TCJA created the SALT cap in the first place

The $10,000 SALT cap was not a stand-alone tax-policy move. It was a revenue-raiser inside the Tax Cuts and Jobs Act of 2017 (P.L. 115-97), chosen because it (a) generated roughly $668 billion of ten-year revenue per the Joint Committee on Taxation score (JCT-X-67-17), more than any other base-broadener in the package, and (b) fell disproportionately on residents of high-tax, predominantly Democratic-leaning states. Critics on both sides described the cap as a federalist-tension instrument — the federal deduction had effectively let high-tax states export a portion of their tax burden onto federal taxpayers in low-tax states, and TCJA repriced that subsidy.

The political framing matters for the durability question. Senator Schumer and the New York / New Jersey / Connecticut / California congressional delegations have introduced full-repeal bills in every Congress since 2018; none has reached the floor with a passing majority because pairing repeal with offsetting revenue is politically expensive on both sides. OBBBA July 2025 (Public Law 119-21, the One Big Beautiful Bill) split the difference: lift the cap for the middle of the affected distribution, phase it out for the top, and preserve the PTET workaround explicitly so high-bracket pass-through owners are not pushed off the deductibility cliff.

The practitioner-relevant point: the $10,000 number was a revenue table, not a principled threshold. Whatever Congress chooses in the next reconciliation cycle is downstream of revenue scoring, not of any underlying tax-policy theory. Plan on durability of some cap, not of any specific number.

What "pass-through entity" means in federal tax law

"Pass-through entity" is not a single Code construct. It is a working category covering four federal classifications, each governed by a different subchapter of Chapter 1 of the Internal Revenue Code:

• Subchapter S corporations — corporations that have made the §1362 election. Income, deduction, loss, and credit flow through to shareholders pro rata on Schedule K-1 (Form 1120-S). Limited to one class of stock, 100 shareholders, and only individual / certain trust / qualified estate shareholders under §1361.

• Subchapter K partnerships — general partnerships, limited partnerships, limited liability partnerships (LLPs), and LLCs that have either defaulted to partnership treatment (multi-member, no §7701 election) or affirmatively elected partnership treatment via Form 8832. Income flows on Schedule K-1 (Form 1065) and is governed by the §704 allocation rules, the §752 liability-share rules, and the §707 disguised-sale rules.

• Single-member LLCs disregarded under §7701 — LLCs with one owner that have not elected corporate treatment. The LLC is treated as nonexistent for federal income-tax purposes; the owner reports activity on Schedule C, Schedule E, or Schedule F. Most state PTET statutes either exclude disregarded SMLLCs (since there is no separate entity to make the election) or require the SMLLC to be owned by another pass-through that itself elects.

• Sole proprietorships — same federal treatment as a disregarded SMLLC; no separate entity, no PTET election available.

The federal election to be treated as an S-corp versus a partnership is made on Form 2553 (S-corp election) or Form 8832 (entity classification election). For PTET purposes the election that matters is not federal classification but state-statutory eligibility — a few state regimes restrict PTET to S-corps only, others to partnerships only, most allow both. The 50-state grid flags eligibility by entity type for every enacted state.

Worked-example narrative: two partners, three years

Consider Avery and Blake, equal 50/50 partners in an Illinois LLC taxed as a partnership. Each year the LLC generates $1,000,000 of qualified business income sourced entirely to Illinois. Avery is a tax resident of Illinois (flat 4.95% individual rate); Blake is a tax resident of Texas (no individual income tax). Both are in the 37% federal bracket on their share of the K-1.

Tax year 2024 — Avery elects in, Blake elects in (forced by Illinois's elect-all-or-none rule). The LLC elects Illinois PTET under 35 ILCS 5/201(p) at the 4.95% entity rate. Entity-level Illinois tax: $1,000,000 × 4.95% = $49,500. Each partner's K-1 ordinary income drops from $500,000 to $475,250. Federal benefit per partner: $24,750 × 37% = $9,158. Avery claims the corresponding Illinois personal credit, zeroing out her Illinois personal liability on the K-1 income. Blake claims no Illinois personal credit (no Illinois personal-return obligation as a non-resident under composite rules) but still captures the $9,158 federal deduction on his federal Form 1040 via the smaller K-1. Both partners benefit; the workaround works on both residents and non-residents in stack-states.

Tax year 2025 — Avery still in, Blake's counsel pushes back on the election. Same facts. Blake's CPA argues that Illinois personal credit is worth nothing to a Texas resident and the QBI offset under §199A eats the federal arbitrage. Run the math: Blake's QBI base drops by $24,750 (his share of PTET); 20% × $24,750 × 37% = $1,832 of QBI deduction lost. Net federal benefit: $9,158 − $1,832 = $7,326. Still positive — but now Blake notices the entity timing risk (PTET cash leaves the entity in Q1; his distribution is correspondingly smaller). Blake elects to stay in, but renegotiates the partnership distribution mechanics under §704(b) to reflect the differential state-credit allocation.

Tax year 2026 — operator-blocked scenario. OBBBA July 2025 lifts the cap to ~$40,000 joint with a $500,000 MAGI phaseout. Avery's federal MAGI is roughly $475,250 + non-K-1 income; if she lands above $500,000 the personal-SALT alternative collapses back toward the $10,000 floor and PTET stays clearly superior. If she lands below, she would compare PTET ($24,750 federal deduction at the entity level, $9,158 saved) against personal-SALT (full ~$40,000 deduction including property tax, ~$14,800 saved) — and personal-SALT may win for that year. The picker on this site runs that comparison annually.

This narrative is illustrative; specific numbers depend on the partner's full federal return, QBI thresholds, NIIT exposure, and state-specific credit refundability. Consult a preparer before electing.

Frequently asked questions