How to Make a Kentucky PTET Election: Form 740-PTET and the 3.5% Rate (2026)

A Lexington marketing consultant runs her firm as an S-corp, clears about $600,000 of Kentucky profit, and files a joint return near $640,000 of income. When she heard the federal SALT cap jumped to $40,400 for 2026, she assumed she could finally deduct her Kentucky income tax again and drop the pass-through entity tax election. It was the wrong call, because her income is high enough that the larger cap phases back down to the old floor, and the pass-through entity tax is the only way left to deduct the state tax on her business. She is theoretical, not an EntityIQ client, but the trap catches a lot of Kentucky owners this year.

What the Kentucky PTET is

Kentucky added an elective pass-through entity tax under KRS 141.209, enacted by House Bill 360 in 2023 and overhauled by House Bill 5, and it reaches back to tax years beginning on or after January 1, 2022. The election lets a partnership, S-corp, or LLC pay Kentucky income tax at the entity level instead of passing all of it through to the owners. Kentucky runs a flat individual income tax, so the computation is simple. The entity pays at the individual rate in effect on the last day of its tax year, which is 4% for 2025 and 3.5% for 2026 after House Bill 1 cut the rate. There are no brackets to work through and no separate PTET rate to look up.

How to make the election

You make the election on Form 740-PTET, which doubles as the entity's return and the payment voucher for the tax. An authorized person signs it, meaning someone with authority to bind the entity. For a calendar-year entity the election is due by April 15, the fifteenth day of the fourth month after the close of the tax year, or by October 15 if the return is on extension. The election is annual and irrevocable once made, so you commit for that year and decide again the next. The entity remits estimated payments during the year on Form 740-PTET-ES.

The owner is not taxed twice

The point of the election is a federal deduction, not an extra layer of Kentucky tax. KRS 141.209 gives each partner, member, or shareholder a refundable credit equal to 100% of their proportionate share of the tax the entity paid. The entity reports each owner's share on Form PTET-CR, and the owner attaches it and claims the credit on Form 740 or 740-NP, line 31(g). Because the credit is refundable and equals the full share, there is no net Kentucky cost from electing. The only thing that moves is where the deduction lands on the federal return.

Why it still beats the SALT cap in 2026

The One Big Beautiful Bill Act, signed July 4, 2025, rewrote IRC §164(b)(6) and raised the cap on itemized state and local taxes from $10,000 to $40,000 for 2025 and $40,400 for 2026. That sounds like it ended the need for a workaround. It did not for higher earners. The larger cap phases out once modified adjusted gross income passes $505,000 for 2026, and above that line the cap drops by 30 cents for every dollar of excess income until it hits a $10,000 floor around $606,333 of MAGI. A Kentucky owner over that figure is right back to the old $10,000 limit, and the pass-through entity tax deducts the state tax the cap would otherwise erase.

The pass-through entity tax works on a different mechanism, and OBBBA left it alone. The state tax is paid and deducted at the business level, so it reduces the income that flows through to the owner before it ever reaches Schedule A, and it is not subject to the $40,400 cap or the phaseout at all. That treatment rests on IRS Notice 2020-75, which confirmed that a state income tax imposed on and paid by the entity is deductible in computing the entity's income, with no SALT cap applied. A scare during the 2025 debate would have barred service businesses like consultants, doctors, and lawyers from the deduction, but the final law dropped that limit and left the pass-through entity tax intact for every qualifying entity.

The math, side by side

Here is the Lexington consultant's math. Her S-corp earns $600,000 of Kentucky profit. Kentucky tax at the flat 3.5% rate is $21,000. Her joint income near $640,000 has already phased her personal SALT cap down to the $10,000 floor, and her property tax uses all of it. Her marginal federal rate is 35%. The state gives her a credit for the tax the entity pays, so there is no extra Kentucky cost. The only thing that changes is the federal deduction.

The swing is $7,350 a year on one election, and the only difference between the two columns is whether the Kentucky tax sits on the business return or on Schedule A, where the cap erases it. The owner still claims the full $21,000 back as a refundable Kentucky credit, so the state side is a wash.

It helps even if you take the standard deduction

The benefit does not depend on itemizing. Because the pass-through entity tax reduces the business income that flows through to your return, an owner who takes the standard deduction keeps the full federal value of the Kentucky tax the entity paid. The election does less for owners whose personal SALT cap is not already used up, meaning lower-income owners, owners with little property tax, and owners who still itemize with room to spare. If your Kentucky income tax already fits under your personal cap, the pass-through entity tax mostly shifts paperwork rather than saving money.

Keep the LLET straight

One Kentucky detail trips people up. The pass-through entity tax is separate from the Limited Liability Entity Tax, the gross-receipts based tax most Kentucky businesses already owe. Electing the pass-through entity tax does not remove the LLET, and the LLET is not part of the federal deduction described here. Treat them as two different obligations on two different bases, and do not count the LLET toward the SALT savings above.

If you own a Kentucky pass-through and your income sits near or above the $505,000 phaseout, run the numbers before you skip the election. The EntityIQ calculator models the federal side so you can see whether the SALT cap has already eaten your deduction. For the entity question underneath all of this, see our guides on S-corp vs LLC and the PTET SALT cap workaround.

This article is educational and is not legal or tax advice. The numbers above are 2026 figures, and the consultant is theoretical. Please consult a qualified CPA or enrolled agent before making a Kentucky pass-through entity tax election.