State PTET Elections in 2026: A Workflow for Partnerships and S Corporations

A pass-through entity tax (PTET) lets a partnership or S corporation pay state income tax at the entity level, deduct it federally and pass a credit or similar benefit to its owners for their state returns. The election became common after the $10,000 SALT cap took effect. The 2025 reconciliation act raised the individual cap for 2025 through 2029, but it also added an income phase-down that returns many high-income owners to $10,000. For most clients who used a PTET before, the election still deserves a fresh look each year. This article covers the federal rule, the decision and a workflow a tax team can repeat.

What is the federal basis for deducting a PTET?

The federal treatment rests on IRS Notice 2020-75. Treasury and the IRS announced they would issue proposed regulations under which a "Specified Income Tax Payment" is deductible by the partnership or S corporation in computing its non-separately stated income or loss for the taxable year in which the payment is made.

Key points in the notice:

• A Specified Income Tax Payment is an amount paid by a partnership or S corporation to a state, a political subdivision of a state or the District of Columbia to satisfy its liability for income taxes imposed on the entity. Taxes imposed by U.S. territories are excluded.
• The definition applies whether the tax results from an election by the entity and whether the owners receive a credit, deduction or exclusion on their own state returns.
• The payment is not a separately stated item for partners or shareholders. It is reflected in their share of non-separately stated income or loss on the Schedule K-1.
• The payment is not taken into account in applying the SALT deduction limitation to the individual owners.
• The rules apply to payments made on or after November 9, 2020, and taxpayers may rely on the notice before the proposed regulations are issued.

Two federal consequences follow. The deduction is taken in the year the entity pays the tax, so payment timing drives the federal year. And because the tax reduces ordinary business income on the K-1, it also lowers the owner's adjusted gross income.

Did the 2025 legislation change PTET treatment?

Section 70120 of Public Law 119-21, the provision that amended the SALT cap, changes only section 164(b)(6) and adds section 164(b)(7). It does not address entity-level taxes. Notice 2020-75 remains the federal framework. Check for later IRS guidance before finalizing a return.

Does the higher SALT cap make the election less useful?

It depends on where the owner sits relative to the phase-down. For 2026 the cap is $40,400, reduced by 30 percent of MAGI over $505,000 (half amounts for married filing separately), with a $10,000 floor. A joint filer reaches the floor at roughly $606,333 of MAGI. See the SALT cap after the 2025 legislation.

Three groups of owners:

1. Owners well below the threshold. If their total state and local taxes fit within the higher cap and they itemize, the PTET may add little federal benefit, since the taxes would be deductible on Schedule A anyway. The analysis should still consider whether they itemize at all.
2. Owners in the phase-down band. The PTET deduction reduces AGI and MAGI, which can restore part of the cap for other state and local taxes such as property tax. This group often benefits the most per dollar of PTET.
3. Owners at the floor. These are back to $10,000, the same as under the old cap, and the original case for the election still applies.

The PTET also moves a deduction from an itemized deduction to an above-the-line reduction of income, which keeps it outside the section 68 limitation on itemized deductions for top-bracket owners. See the itemized deduction limitation.

How do state elections differ?

Each state sets its own election method, deadline, rate, payment schedule and owner credit. Two examples show how much they vary:

• New York. Partnerships and New York S corporations elect annually, online, from January 1 through March 15. The election can be revoked until the due date of the first estimated payment and is irrevocable after that. Estimated payments are due March 15, June 15, September 15 and December 15. Partners cannot treat the entity's PTET estimated payments as their own, so owners must still make their own estimated payments. Eligible owners claim the credit on Form IT-653.
• California. The 2026 instructions for Form FTB 3893 state that the elective tax and credit are extended for taxable years beginning on or after January 1, 2026, and before January 1, 2031. The rate is 9.3 percent of qualified net income. The election is made on an original, timely filed return and is irrevocable for the year. A first payment is due on or before June 15 of the election year: the greater of $1,000 or 50 percent of the prior year's elective tax. The balance is due by the original return due date without extensions. For 2026 and later, an entity that misses or underpays the June 15 payment can still elect, but each owner's credit is reduced by 12.5 percent of that owner's share of the unpaid amount.

Other states have their own rules, including eligibility limits on who may be an owner, whether guaranteed payments are included and whether the credit is refundable or carries forward. Read the current state form instructions for every state where a client files. Do not copy one state's calendar to another.

The annual PTET workflow

1. Screen the client list (first quarter)

For each partnership and S corporation client, list the states where it files and whether each state offers an elective tax. Pull the owners' expected MAGI, filing status and whether they itemize. Flag entities with nonresident owners, corporate or partnership owners, and owners in states that do not credit another state's PTET.

2. Model the benefit by owner

Compare, for each owner, the federal tax with and without the election. Include the effect on the SALT cap phase-down, the section 68 limitation, the owner's resident state credit for taxes paid to other states and any state addback of the PTET deduction. Consider how lower K-1 income affects other computations, such as the QBI deduction. See the QBI deduction after the 2025 legislation.

3. Get consent and document it

Some states require owner consent or let owners opt out. Record the consent, the owners covered and the person authorized to make the election. In New York, tax professionals cannot make the election for clients; an authorized person for the entity must do it online.

4. Make the election and calendar the payments

Calendar the state's election deadline and each payment date. Because the federal deduction follows the year of payment, decide whether a payment should fall before or after December 31.

5. Track the owner credit

Build a schedule by entity, state, year and owner showing tax paid, the owner's share, the credit reported and the credit claimed. Reconcile it to the state return and to each owner's state return. Watch for reduced credits from late payments and for credits that carry forward.

6. Report on the federal return

Deduct the PTET paid during the year in computing ordinary business income. It should not appear as a separately stated tax item on the K-1. Provide owners with the state information they need to claim the credit.

7. Adjust owner estimates

The entity payment does not replace the owner's own estimated payments unless the state says it does. See estimated tax payments and the 2026 federal due date calendar.

Common errors

• Deducting an accrued but unpaid PTET in the wrong federal year.
• Separately stating the PTET on the K-1.
• Missing a state payment that reduces the owner credit.
• Assuming a resident state will credit a PTET paid to another state.
• Electing for an owner who would have deducted the tax under the higher cap anyway, without modeling the result.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• IRS, Notice 2020-75: https://www.irs.gov/pub/irs-drop/n-20-75.pdf
• U.S. Government Publishing Office, Public Law 119-21, section 70120: https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
• IRS, Publication 505 (2026), Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
• New York State Department of Taxation and Finance, Pass-through entity tax: https://www.tax.ny.gov/bus/ptet/
• California Franchise Tax Board, 2026 Instructions for Form FTB 3893: https://www.ftb.ca.gov/forms/2026/2026-3893-instructions.pdf

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error