Tax
Pass-Through Entity Tax (PTET)
A state-level tax election that lets passthrough entities pay state tax at the entity level, sidestepping the federal SALT cap. Enacted in most states with income tax, including California, New York, and Massachusetts.
PTET workarounds emerged after the 2017 SALT cap limited individual state tax deductions to $10,000. Most states with an income tax now allow passthrough entities to pay state tax directly, which is then deductible at the federal level. The owner takes a credit against their state personal return for the entity's payment, so the state tax is effectively the same but the federal deduction is restored.
California's PTET is 9.3%, elected annually with a prepayment due June 15 and a final payment with the entity return. Owners take a credit on their CA Form 540. New York's PTET is graduated (up to 10.9%), elected by March 15, with quarterly estimates. Massachusetts PTET is 5%, elected on Form 63D-ELT, filed with the entity return; the owner claims the credit on their MA personal return using Schedule PTE.
Whether PTET actually helps depends on the math. It saves federal tax only when the owner's marginal federal bracket times their state tax paid exceeds what they were already deducting. High-income owners in high-tax states almost always come out ahead; owners near the $10K SALT cap or with low state income should model it before electing.
Common pitfalls
- Forgetting the June 15 CA prepayment (or March 15 NY election) for the next year's election
- Electing PTET when the math doesn't actually save federal tax at your bracket and state-tax mix
- Not coordinating the entity's PTET payment with the personal credit on the owner's return, so the credit gets missed
- Assuming every state's PTET is elective the same way — Massachusetts, New York, and California all have different deadlines and forms
Related service
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