Pass Through Entity (PTE) Tax: Your Smartest Move Against the SALT Cap

What we’ll cover:

• What is the Pass-Through Entity (PTE) Tax Election?
• Why the PTE Election Could Save You Thousands
• What to Watch Out For
• Who Should Consider This?
• What to Do Next

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📘 What is the Pass-Through Entity (PTE) Tax Election?

The PTE election allows qualifying businesses - think S corps, partnerships, and LLCs taxed as such - to pay state income taxes at the entity level. This payment becomes a fully deductible business expense on your federal return.

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It was introduced as a workaround to the federal $10,000 SALT deduction cap, giving business owners a smart, legal path to reclaim what was once deductible before the 2017 Tax Cuts & Jobs Act (TJCA).

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✅ Why the PTE Election Could Save You Thousands

Over 30 states now offer PTE elections, and it’s quickly becoming one of the most effective state tax strategies for business owners.

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Here’s what makes it powerful:

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• Bypasses the SALT cap: State income taxes are no longer limited to a $10K itemized deduction. When paid as PTE tax, these payments become fully deductible by the business.
• Reduces federal taxable income: Lowers what flows through to your personal return.
• Boosts after-tax cash flow: More money stays in your pocket, especially at high federal brackets (32%+).

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📊 Real-World Savings Example

Let’s dive into the impact for a business owner with $1M of annual profit, paying tax in the 37% federal tax bracket and a 10% state flat tax.

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State Income Tax:

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• Without PTE - $100K paid personally
• With PTE - $100K paid by the business

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Federal Tax Deduction:

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• Without PTE - $10K itemized deduction
• With PTE - $100K business deduction

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Federal Tax Savings:

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• Without PTE - $3700
• With PTE - $37,000

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💸 Total savings for the year: $33,300

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⚠️ What to Watch Out For

While powerful, the PTE election isn’t a “set it and forget it” move. Here are key things to consider:

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• Deadlines matter: States often require an election or estimated payment to be made during the tax year, so if you wait until tax time to decide if this is for you, you might be too late
• Cash flow planning: You may need to front-load estimated taxes at the entity level to meet eligibility requirements, and want to pay as much as possible before the end of the year to maximize your federal deduction.
• Irrevocable decision: Once elected for a tax year, it’s rare that you will be able to reverse your decision. If your situation changes or you move states, your cash could be tied up until you file your taxes the following year.
• Planning complexity: PTE elections are generally available for any S Corporation or Partnership you own an interest in, as long as the business is in an eligible state and meets the PTE requirements. If you are electing to pay PTE tax through a business you own a minority interest in, it may be challenging to access information needed for accurate tax planning during the year.
• Not available in every state: Rules and benefits vary widely for each state. If you’re in multiple states, making the election in one may not offset income in others.

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👤 Who Should Consider This?

You’re a great candidate for the PTE election if:

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• You own a business taxed as an S corporation or partnership
• You live in a high-tax state offering a PTE election
• You expect to owe $20K+ in state income taxes personally
• You want to maximize federal deductions without restructuring your business

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🚀 What to Do Next

#1: Check your eligibility

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As of 2025, over 30 states offer PTE tax elections, including:

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• California
• New York
• Illinois
• New Jersey
• Arizona
• Colorado
• Georgia
• Massachusetts
• Oregon
• South Carolina

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#2 Decide early

Some states close the window by Q1 of the current year, so you want to act early to make sure you don’t miss an election deadline!

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#3 Coordinate with your tax team

If you’re making a PTE for a business with tax filings managed by Gelt, we’ll help you understand what you need to pay and when, based on your expected income for the year.

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If you’re making a PTE for a business with tax filings managed by someone else, it’s important to know if you made an election so we can plan efficiently.

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#4 Monitor your K-1s

Particularly if the taxes are managed by someone else, double check your K-1 to make sure you get credit for any PTE tax paid on your behalf. If Gelt manages your business taxes, we’ll take care of this for you.

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ℹ️ This information is for educational purposes only and does not constitute legal, investment or tax advice. Consult a qualified professional before making any investment or legal decisions, and your tax team before making any tax decisions.