The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes at $10,000 — covering income, sales, and property taxes combined. For a business owner in a state with a meaningful income tax, that cap can strand tens of thousands of dollars of otherwise-deductible state tax every year. A partner or S-corporation shareholder paying $60,000 in state income tax on their business earnings gets to deduct just $10,000 of it federally; the other $50,000 delivers no federal benefit at all. The cap hit pass-through owners especially hard, because their business income taxes flow onto their personal returns where the cap lives.
States responded with an elegant fix. Instead of the owners paying the state income tax individually — where it's crushed by the $10,000 cap — the pass-through entity elects to pay a state tax at the business level. Because a business's state income tax is an ordinary deductible expense, the entity writes it off on its federal return before the income passes through to the owners. The owners then receive a state tax credit for their share, so they aren't taxed twice at the state level. The net effect: the full state tax becomes federally deductible, entirely legally. The IRS blessed the mechanism in Notice 2020-75, and roughly three dozen states now offer a pass-through entity tax election. For a Florida-based owner, there's an even simpler story — with no Florida income tax, there's nothing to cap.
Why the SALT cap hurts pass-through owners
The SALT cap applies to the individual itemized deduction on Schedule A. Because S-corporations and partnerships don't pay federal income tax themselves — their income flows through to the owners' personal returns — the owners historically deducted the related state income tax as part of their personal SALT deduction. After 2017, that deduction was capped at $10,000, no matter how large the owner's actual state tax bill.
| Owner's state income tax on business income | Deductible without PTET | Stranded (no federal benefit) |
|---|---|---|
| $8,000 | $8,000 (under the cap) | $0 |
| $25,000 | $10,000 | $15,000 |
| $60,000 | $10,000 | $50,000 |
| $150,000 | $10,000 | $140,000 |
The higher your state tax bill, the worse the cap bites — and property taxes and other state taxes eat into the same $10,000, often using it up before any income tax is counted. This is precisely the gap the pass-through entity tax closes.
How the PTET workaround actually works
The mechanism reroutes the tax from the individual level (capped) to the entity level (uncapped). It relies on a simple truth: a business's state income tax is an ordinary and necessary business expense, fully deductible on the federal return — and business expenses aren't subject to the personal SALT cap.
The entity elects PTET
The partnership or S-corporation makes a state election to be taxed at the entity level. Election timing varies — some states require it early in the year, others allow it with the return.
The entity pays state income tax
The business calculates and pays state income tax on its income at the entity level, often at that state's top individual rate.
The entity deducts it federally
That state tax is a business expense, so the entity reduces its federally reported income by the full amount before anything flows through to owners — no $10,000 cap applies.
Owners claim a state credit
On their state returns, owners receive a credit (or income exclusion) for their share of the entity-level tax, preventing double taxation at the state level.
The owners keep the federal benefit
The full state tax has been federally deducted at the entity level, so owners get the deduction they would have lost to the SALT cap — legally and with IRS blessing.
This isn't an aggressive loophole. In Notice 2020-75, the IRS stated that state and local income taxes imposed on and paid by a partnership or S-corporation are deductible by the entity in computing its non-separately-stated taxable income — and are therefore not subject to the individual $10,000 SALT cap. States built their PTET regimes directly on that guidance, which is why the workaround is now mainstream rather than fringe.
Which states offer it — and Florida's simpler answer
Roughly three dozen states with an income tax have enacted a pass-through entity tax. But "they all have a PTET" hides enormous variation: election deadlines, whether the election is annual or binding for multiple years, the tax rate, how the owner credit is computed, and whether nonresident owners qualify all differ by state. A PTET election that saves a New Jersey owner thousands can be a trap if made without checking the mechanics in each state where the business operates.
States with an income tax + PTET
- Owners can elect entity-level tax to bypass the SALT cap
- Election timing and rates vary widely by state
- Owner receives a state credit or income exclusion
- Multi-state entities must evaluate each state separately
- Often most valuable for owners with large state tax bills
Florida (no state income tax)
- No personal income tax, so no PTET is needed
- Pass-through business income faces no Florida income tax
- The SALT cap simply doesn't strand Florida income tax
- C-corporations still pay Florida's 5.5% corporate tax
- Owners operating in other states may still want PTET there
For a business owner living and operating in Florida, the SALT cap on state income tax is largely a non-issue — Florida imposes none, so there's nothing to work around. The PTET conversation matters for Florida-based owners mainly when they have pass-through income sourced to other states with an income tax.
Is a PTET election right for you?
The workaround is powerful but not automatic — it's an election with real mechanics, and it isn't beneficial in every situation. Run through the decision points before filing.
- You're an S-corporation or partnership (not a sole proprietor or single-member LLC — those generally can't elect)
- Your state has an income tax and a PTET regime
- Your state income tax on business income clearly exceeds the $10,000 cap you'd otherwise be stuck with
- You've confirmed the election deadline — many states require it early in the tax year
- You've modeled the owner-level credit so no one is worse off at the state level
- You've checked interactions for owners who live in a different state than the entity operates in
Timing is where PTET savings are most often lost. Many states require the election and even an estimated payment during the tax year, not when you file the return the following spring. If you decide in April that you should have elected for last year, it's frequently too late. Build the PTET decision into your fourth-quarter tax planning, not your filing-season checklist — and revisit it each year, since some elections are annual.
The 2026 landscape
The SALT cap has been one of the most-debated provisions in the tax code, and recent legislation has continued to adjust it. Because the specific dollar figures and any phase-outs can change year to year and are subject to income-based limits, the prudent move is to confirm the current cap amount and rules for your income level with your preparer before you plan around it. What has remained stable is the underlying structure: an individual-level SALT limitation that a properly made entity-level tax election can legally sidestep, backed by IRS Notice 2020-75.
The $10,000 SALT cap strands state income tax for pass-through owners because it lives on the individual return. The pass-through entity tax fixes it by moving the tax to the business level, where it's a fully deductible expense free of the cap — with owners receiving a state credit so they aren't taxed twice. Roughly three dozen income-tax states offer it, the IRS validated it in Notice 2020-75, and the biggest execution risk is missing the election deadline. Confirm your state's mechanics and the current cap rules each year, model the owner-level credit before electing, and remember that Florida owners have little to work around on Florida income — the PTET matters most for the income they source to other states.
Stop leaving your state-tax deduction on the table
The pass-through entity tax election can restore the deduction the SALT cap took away, but the timing and owner credits matter. Talk to our team about whether it fits your situation before the election deadline passes.
Talk to a tax proSources
- IRS — Notice 2020-75 (deductibility of state taxes paid by pass-through entities)
- IRC Section 164(b)(6) — Limitation on the state and local tax deduction ($10,000 cap)
- Tax Cuts and Jobs Act of 2017 (Public Law 115-97)
- Florida Department of Revenue — Corporate Income Tax (no personal income tax; 5.5% corporate rate)
- IRS — Instructions for Form 1120-S and Form 1065 (pass-through entity reporting)
Frequently asked questions
The SALT cap is the $10,000 limit on the federal itemized deduction for state and local taxes — income, sales, and property taxes combined. Enacted by the 2017 Tax Cuts and Jobs Act, it sharply reduced the deduction for taxpayers in higher-tax states and for business owners with substantial state income-tax bills.
Instead of the owners paying state income tax individually (where it's capped at $10,000), the pass-through business itself elects to pay a state-level entity tax. That tax is a business expense the entity deducts on its federal return before income flows through to the owners — so it isn't subject to the individual SALT cap. Owners typically receive a state credit for their share.
Roughly three dozen states with an income tax have enacted a PTET, though the details — election timing, rate, credit mechanics, and whether it's annual or binding — differ significantly by state. States with no income tax, like Florida, have no PTET because there is no state income tax to work around.
Yes. In Notice 2020-75, the IRS confirmed that a state income tax imposed on and paid by a pass-through entity is deductible by the entity in computing its non-separately-stated income — validating the core mechanism the state PTET regimes rely on.
