How to Make an Indiana PTET Election

Say a design firm runs as an S-corp in Indianapolis and clears $400,000 of Indiana profit. The owner's income is well into the six figures, so her federal deduction for state and local taxes is already spent. She pays Indiana income tax on that profit and gets nothing for it on her federal return. The Indiana PTET election fixes that, and it costs her no extra state tax to use it. This owner is theoretical, not an EntityIQ client, but the setup is a common one across Indiana's professional-services shops.

What the Indiana PTET is

Indiana calls its version the pass-through entity tax, and it lives in Indiana Code § 6-3-2.1. The General Assembly enacted it through Senate Enrolled Act 2 in 2023 and made it retroactive to January 1, 2022, so it applies to every open year back to the start of the federal cap. When a qualifying entity elects, it pays Indiana income tax on its own income, and the owners take a credit on their personal returns so the same dollars are not taxed twice at the state level. The Indiana Department of Revenue lays the mechanics out in Income Tax Information Bulletin #72.

The reason any of this exists is the federal cap. The One Big Beautiful Bill Act raised the state and local tax deduction ceiling under IRC § 164(b)(6) to $40,400 for 2026, but that larger cap phases back toward $10,000 once modified adjusted gross income passes $505,000, and it is scheduled to snap back to $10,000 in 2030. A tax the business pays and deducts never lands on Schedule A, so it sidesteps both the cap and the phaseout. That treatment rests on IRS Notice 2020-75, which confirmed a state income tax imposed on and paid by the entity is deductible in figuring the entity's income, with no cap applied.

The rate is a flat 2.95%

The Indiana pass-through entity tax is a flat 2.95% for 2026, because it tracks the state's flat individual adjusted gross income tax rate. That rate stepped down from 3.0% in 2025 and is scheduled to drop again to 2.90% in 2027. It is one of the lowest PTET rates in the country, so the election earns its keep on volume: it takes a large amount of Indiana profit before the federal deduction is worth the extra return. On $400,000 of eligible income the entity tax is $11,800. Because the PTET rate is the same rate the owner would pay on the same income anyway, the credit that comes back on the owner's return lines up almost exactly with the Indiana tax on that income, which is cleaner than states where the entity rate and the owner rate differ.

Who can elect, and who gets the credit

Both S-corps and partnerships can elect. The tax is figured on the aggregate share of the entity's adjusted gross income attributable to its owners, using each resident owner's full share and each nonresident owner's Indiana-source share. The entity's direct owners claim a refundable credit equal to their pro rata share of the tax the business paid. For an individual owner it lands on the Indiana personal return, and because it is refundable, any credit that exceeds the owner's Indiana liability comes back as a refund rather than being lost. For a single-owner S-corp none of the allocation math bites, since one shareholder holds the whole share.

How to make the election

You make the election on the entity's Indiana return, Form IT-20S for an S-corp or Form IT-65 for a partnership, by checking the pass-through entity tax box and filing Schedule IN-PTET with the return. It has to be on a timely filed return, including any extension, so for a calendar-year filer that is April 15 or the extended due date. Indiana also accepts a standalone IN-PTET election form emailed to the Department if you want the election on record before the return is filed. The election is made annually and, once made for a taxable year, it cannot be revoked for that year. An election for one year does not carry over, so you decide again every year. That is why you want the math settled before you check the box, not after.

Pay it as you go

An electing entity is expected to remit the tax during the year, not in one lump at filing. Start the estimated payments as soon as the decision looks likely, because waiting can leave the entity short and exposed to underpayment charges on a tax it always intended to pay. Treat the PTET like any other tax with a due date across the year, not a year-end afterthought.

The owner side is an addback plus a refundable credit

Here is the part worth slowing down on. Indiana keeps the state side even. The owner adds their share of the deducted tax back on the Indiana return and then claims the refundable credit for the tax the business paid, so the state result is close to a wash and the federal deduction is the real prize. In plain terms, the state still taxes the full profit, the owner still gets full credit for the tax the business paid, and the only figure that actually moves is the federal deduction. One Indiana wrinkle to keep straight: all 92 Indiana counties levy their own local income tax, and those county taxes are not part of the entity-level election. Owners still owe county tax on their share of the income on their personal returns, so the credit that comes back to them covers the state piece, not the local piece.

The math, side by side

Back to the theoretical Indianapolis design firm. Its S-corp has $400,000 of Indiana income, all of it attributable to the one owner, and her federal marginal rate is 35%. Her income has already phased the personal SALT cap down toward the floor, and her property and other state taxes use up what is left, so Indiana income tax on the firm buys her nothing on Schedule A. The Indiana tax she owes is the same either way. Only the federal deduction moves.

The swing is about $4,130 a year on one election, and the only thing separating the two columns is whether the Indiana tax sits on the business return or on Schedule A. The state tax is identical. The federal deduction is the whole game. One note of honesty on the number: if you still get the full 20% qualified business income deduction under IRC § 199A, shrinking the flow-through income by $11,800 also trims that deduction, so the real benefit lands a bit under the headline. Plenty of higher earners are already past the QBI wage limit, and for them the full amount stands.

When it is not worth the paperwork

The election is not free. It means a pass-through entity tax computation on the business return, payments to schedule across the year, and a credit to track on each owner's return. Indiana's low 2.95% rate raises the bar further, since the federal deduction is only 2.95% of profit multiplied by your federal rate. If your income sits under $505,000 and your total state and local taxes come in under the $40,400 cap, the larger federal cap may already capture everything you pay, so the election just adds work. It earns its keep when the Indiana profit is large, your income is high enough to shrink the personal cap, or both. Run the numbers before you file, because the answer turns on where your income lands.

If you want to see whether an S-corp election makes sense in the first place, the EntityIQ calculator models the self-employment tax side, and our guide on the PTET SALT cap workaround walks through the federal mechanics. For how neighboring states handle their versions, compare the Ohio PTET election or the Illinois PTET election.

This article is educational and is not legal or tax advice. The figures above are 2026 amounts, and the owner is theoretical. Indiana rules change, and the deduction interacts with the QBI deduction and multistate credits, so please consult a qualified CPA before making the election.