How to Make an Oklahoma PTET Election: Form 586, the 4.75% Rate, and the Income Exclusion

An architect in Oklahoma City runs her design firm as an S-corp. It clears about $400,000 of Oklahoma profit a year, and every dollar lands on her personal return through a K-1. Between her property tax, her state income tax, and a rental house she owns on the side, she passed the federal cap on state and local tax deductions years ago. So the roughly $19,000 of Oklahoma income tax she pays on that business income buys her nothing on her federal return. She is theoretical, not an actual EntityIQ client, but her problem is common, and Oklahoma has had the fix sitting in the statute since 2019. It is the pass-through entity tax, and you make the election on Form 586.

Oklahoma got here first

Most states rushed out their pass-through entity taxes after the IRS gave the structure its blessing in Notice 2020-75. Oklahoma moved a year earlier. The Pass-Through Entity Tax Equity Act of 2019, House Bill 2665, is codified at 68 O.S. sections 2355.1P-1 through 2355.1P-4 and applies to tax years beginning on or after January 1, 2019. The mechanics are the same as everywhere else. The cap under IRC section 164 limits the state and local tax an individual can deduct, but it does not touch a state income tax the business itself pays and deducts as a business expense. Move the tax to the entity, and the deduction moves with it, out from under the cap.

What the SALT cap actually costs you

For 2026 the cap on state and local tax deductions is $40,400, up from $40,000 in 2025, under the version of section 164 rewritten by the 2025 tax law (Public Law 119-21). That cap phases down once modified adjusted gross income passes $505,000, dropping by 30 cents for every dollar over the threshold, though it never falls below $10,000, and it reverts to a flat $10,000 in 2030. For a business owner in a state with an income tax, that ceiling fills up fast. Property tax alone can eat most of it, and the state income tax on a healthy K-1 gets stranded above the line. I walk through that math in the $40,000 SALT cap guide and the general PTET deduction guide.

The rate and how to elect

Oklahoma's entity-level rate is a flat 4.75% on each individual, trust, or estate member's share of Oklahoma net entity income, because it tracks the top individual income tax rate. Corporate members are taxed at 4%, the corporate rate. There is no county or city layer on top, so a Tulsa firm and a small-town shop run the same numbers.

You make the election by filing Form 586, the Pass-Through Entity Election Form, within two months and 15 days after the beginning of the tax year. For a calendar-year business that deadline is March 15. Since the 2024 tax year, Oklahoma also lets you elect right on the entity return, Form 512-S for an S-corp or Form 514 for a partnership, as long as the return is filed on time including extensions. Once made, the election carries forward to later years until you revoke it. You revoke in Part 2 of the same Form 586, and if you file the revocation within that same two-month-and-15-day window it takes effect for the current year, otherwise it applies to the following year.

Oklahoma's twist: an exclusion, not a credit

This is the part that trips people up. In most states the owner claims a credit for their share of the entity tax the business paid. Oklahoma does it the other way. The electing entity pays the 4.75%, and each member then excludes the covered Oklahoma income from their own Oklahoma return. You attach a schedule listing the entity, its FEIN, and the federal and Oklahoma income covered by the election, and that income simply drops off your personal return. There is no separate credit line to reconcile and nothing to carry forward. It also cuts both ways. If the business runs an Oklahoma loss for the year, you exclude that loss too, so you give up the personal deduction you would otherwise have taken. That is one reason the election is a year-by-year decision and not a set-and-forget box.

The savings, in a theoretical case

Back to the architect. Her firm elects, so the S-corp pays 4.75% on $400,000, which is $19,000 of Oklahoma tax at the entity level. That $19,000 is now a business deduction that reduces her federal K-1 income, and it never touches the SALT cap. What that saves her on the federal side depends only on her marginal bracket. The figures below are theoretical and rounded, and they assume she was already over the cap so the state tax would have been wasted otherwise.

That QBI wrinkle is worth a sentence. The entity-level tax lowers the ordinary income flowing out on the K-1, and that income is usually also qualified business income under section 199A. So a $19,000 deduction can trim the 20% QBI deduction by about $3,800, clawing back part of the benefit unless the owner is already limited on QBI by income or the wage test. I cover those limits in the QBI deduction guide. Owners fully phased out of QBI feel none of this and keep the whole marginal-rate saving.

Where it backfires, and who should skip it

The election is not free money. Pay the tax on time or you lose the year. Because the federal deduction rests on Notice 2020-75, a cash-method entity deducts the payment in the year it is actually paid, so the architect needs to send Oklahoma the money by December 31, 2026 to deduct it on her 2026 return. An entity that waits until it files in the spring pushes the deduction a year down the road, which is why electing businesses make an estimated payment before year-end. Skip it entirely if your state and local taxes already fit under the cap, since there is no federal deduction to rescue. And check the owner mix first. Nonresident and corporate owners change the picture, and the exclusion has to be reported correctly on every owner's return to hold together.

If you run an Oklahoma S-corp and your K-1 income is large enough that the state tax is stranded above the SALT cap, the Form 586 election is one of the cleaner ways to recover a real federal deduction. Before you commit, run your own numbers, including your salary and the QBI effect, in the EntityIQ S-Corp calculator, and confirm the reasonable-salary side of the house with the reasonable compensation guide.

This article is educational and is not legal or tax advice. The figures are 2026 amounts, the architect is theoretical, and state rules change. Please confirm the current forms and your own facts with a qualified CPA or enrolled agent before you make the election.