PTET Deduction 2026: The SALT Cap Workaround for S-Corps and Partnerships

The deduction for state and local taxes has been capped since 2018. The Tax Cuts and Jobs Act added IRC §164(b)(6), which held the itemized deduction for state and local taxes to $10,000 a year. For a high earner in a state that runs its own income tax, that single line turned tens of thousands of dollars of real tax into a nondeductible expense.

What the SALT cap looks like in 2026

The One Big Beautiful Bill Act, signed July 4, 2025, raised the cap but kept it in place. For 2025 the limit is $40,000. For 2026 it rises to $40,400, and it climbs 1% a year through 2029 before dropping back to $10,000 in 2030. There is a catch for higher incomes. The cap phases down once modified adjusted gross income passes $500,000 in 2025 and $505,000 in 2026, falling by 30 cents for every dollar of MAGI above that line. It never drops below $10,000. So a 2026 joint filer with MAGI of about $606,000 or more lands right back at a $10,000 cap, the same place they started before the bill passed.

How the PTET deduction works

Here is the move. Most states that have an income tax now let a partnership or S-Corp elect to pay its owners' state income tax at the entity level, instead of having each owner pay it personally. That entity-level tax is the pass-through entity tax, or PTET. Because the business pays it, the business deducts it. The IRS approved this in Notice 2020-75, which treats a state PTET as a "specified income tax payment" that the entity subtracts when it computes its ordinary income.

A PTET is deducted at the entity level, before income reaches your personal return, so it lowers the K-1 income you report rather than showing up as an itemized deduction on Schedule A. That is why it sidesteps the cap entirely. The owners then claim a credit or a subtraction on their state return for the tax the entity already paid, so the same income is not taxed twice by the state.

The savings, in numbers

Back to the theoretical couple. Their S-Corp earns $600,000 and owes about $54,000 of state income tax at a 9% rate. Their income sits well past the phaseout, so their personal SALT cap is stuck at $10,000. Figures are rounded and use 2026 amounts.

Without the election, only $10,000 of that $54,000 is deductible, worth about $3,700 at the top 37% federal rate under IRC §1. With the election, the S-Corp deducts the full $54,000 before a dollar passes through, worth about $19,980 at the same rate. Electing the PTET saves this couple roughly $16,280 in federal tax for the year, and the only thing that changed is who writes the check to the state.

Why it still pays after the higher cap

You might assume a $40,400 cap makes the workaround pointless. It does not, and the reason is the phaseout. For a joint filer with MAGI over about $606,000 in 2026, the cap is floored at $10,000, so the PTET still rescues the entire deduction. Even inside the phaseout band, between $505,000 and roughly $606,000 of MAGI, each extra dollar of income trims 30 cents off the cap, which works like a hidden surtax on top of your regular bracket. A PTET deduction lowers your MAGI, which can walk you back down that band and restore part of the cap at the same time it shelters your state tax. High earners in states with their own income tax are still the clearest winners.

Getting the election right

A PTET is a state-by-state election, and the rules are not uniform. More than 35 states with an income tax now offer one, but the deadlines, the estimated payment schedule, and whether owners receive a credit or a deduction all differ by state. Most states require the entity to actually pay the tax inside the tax year for it to be deductible that year, so a December payment deadline is common and easy to miss. An earlier draft of the 2025 bill would have stripped the deduction from service businesses like law, medicine, and consulting, but the final law kept the workaround for every kind of pass-through. One thing did change. For 2026 and later, the PTET has to be separately stated on each owner's Schedule K-1, so the reporting is tighter than it used to be.

The PTET is one of the few SALT cap workarounds the IRS has actually endorsed, but it is not automatic and it is not free. If you own an S-Corp or partnership in a state with an income tax, I would run the federal S-Corp numbers first with the EntityIQ S-Corp tax calculator, then talk to your CPA about layering a PTET election on top. For the rest of the federal picture, see our guides on the QBI deduction and the S-Corp vs LLC entity choice.

This article is educational and is not legal or tax advice. The figures above are 2026 amounts, and the owners are theoretical. State PTET rules change often, so confirm your own state's deadlines and consult a qualified CPA before you elect.