Pass-Through Entity Tax (PTET): State-by-State Guide

The Pass-Through Entity Tax (PTET) is a state-level election available in 33 states, plus Washington DC and select localities (NYC, Philadelphia) that allows pass-through entities (S-Corps, LLCs taxed as partnerships, and partnerships) to pay income tax at the entity level rather than having income pass through to individual owners' tax returns. Note: Sole proprietorships are NOT eligible for PTET elections. PTET interacts with the federal SALT (State and Local Tax) deduction cap, which limits combined deductions to $10,000 for tax years 2018-2025. The SALT cap sunsets to unlimited deductions after December 31, 2025 (reverting to pre-TCJA unlimited deduction) under IRC §164(b)(6). By electing PTET, entities pay state income tax at the entity level, and owners can claim the PTET payment as a federal deduction against their federal taxable income, with the deduction applying under IRC §164(a)(3) as a business expense (outside the SALT cap limitation). The PTET payment is deductible for federal income tax purposes under IRC §164 for eligible entities. PTET elections vary by state in terms of tax rate, filing requirements, election deadlines, and interaction with federal tax treatment. States with PTET programs include California, Illinois (made permanent by Public Act 103-7, signed June 7, 2024), Maryland, Michigan, New York (annual election required), and others. Minnesota's PTET program is scheduled to sunset after tax year 2025.

State-specific PTET rules vary because each state enacted its own legislation independently. California permits late PTET elections after the June 15 deadline, with late payment penalties and interest per state law. Illinois made its PTET program permanent through legislation enacted in June 2024 (Public Act 103-7), eliminating the prior sunset provision. Michigan offers deadline extensions for PTET elections, with extensions available under specific conditions (good cause, federal extension filed); not automatic until March 31. New York requires annual PTET elections with a March 15 deadline each year, even if you elected in prior years. Minnesota's PTET program is scheduled to sunset after tax year 2025 (currently in effect through 2025 per MN Stat. § 289A.08, subd. 7a(h)). Each state imposes different tax rates: some states allow 100% pass-through of the PTET obligation (owners deduct their share), while others cap deductibility. Federal tax treatment of PTET payments differs by state program design: while federal law allows a deduction for PTET payments made to states, this deduction doesn't reduce self-employment tax for solo entrepreneurs, though it does reduce federal income tax. For multi-state entities, compliance involves tracking each state's separate election deadline, tax rate, and credit mechanism.

PTET planning involves coordinating with your overall tax strategy and consulting professionals familiar with both federal and state tax implications. For high-income business owners in states with high income tax rates and active PTET programs (California, New York, Illinois, Maryland, Michigan), electing PTET allows state tax payments to count as full federal deductions outside the SALT cap limitation. Some entities may prefer not to elect PTET if they have low-income owners who cannot fully use federal deductions, or if the state's tax rate structure produces limited federal benefit. Additionally, PTET program permanence varies by state: Illinois made its program permanent in June 2024 (Public Act 103-7), California's program has no original sunset (proposals for extensions through 2030 have not been enacted as of 2024), and Minnesota's program is scheduled to sunset after tax year 2025. For entities operating in states without PTET or where programs have expired, alternative approaches include timing income realization, considering entity restructuring, or evaluating business relocation. A state and local tax specialist can evaluate whether PTET aligns with your situation and ensure compliance with state-specific election deadlines, which vary and require careful tracking.