Over the past few years, one thing has surprised me more than anything else: Many business owners still don’t know what PTET is—or they’ve heard of it but never really looked into it.

Even more surprising, I’ve also seen situations where firms are aware of it but aren’t actively using it as part of their tax planning process.

PTET (Pass-Through Entity Tax) is not a new concept at this point, but it’s still one of the few remaining opportunities to reduce the impact of the federal SALT limitation. And with the upcoming changes, understanding how it works, and more importantly, planning around it has become even more important.

What Is PTET, and Why Does It Exist?

PTET was created as a workaround to the federal SALT (state and local tax) deduction cap. In the past, individuals can only deduct up to $10,000 of state and local taxes on their federal return. For business owners in high-tax states like California, that limitation often means a large portion of their state taxes is effectively non-deductible.

PTET shifts that deduction to the entity level. Instead of paying state tax personally, the S-Corp or partnership pays the tax. That payment is treated as a business expense, which reduces federal taxable income before it flows through to the owner.

In California, where state taxes are relatively high, this can create a meaningful difference. But again, the benefit depends on whether it’s actually being used—and used correctly.

What’s Changing in 2025 and 2026

Starting in 2025, the SALT deduction cap is expected to increase from $10,000 to $40,000. On the surface, that sounds like it reduces the need for PTET. But there’s an important detail that often gets overlooked.

The higher SALT cap is subject to an income phase-out. Once your income reaches around $500,000, the benefit starts to decrease. As income continues to rise, the deduction is gradually reduced, and by around $600,000, it effectively returns to the original $10,000 limit.

For many business owners, especially in California, that means the “increase” doesn’t really change the outcome. And for those High-Income business owners, that’s exactly when PTET starts to shine.

How This Shows Up in Practice

Take a fairly common situation in California. A business owner generates around $800,000 of income and pays roughly $70,000–$80,000 in California state tax.

Under the new SALT rules, because their income is above the $500,000 threshold, most of that state tax deduction is phased out. On their personal return, they’re still effectively stuck at the $10,000 SALT limit. That means $60,000+ of state tax is paid, but not deductible for federal purposes.

Now compare that to the same situation with a PTET election in place. Instead of paying the state tax personally, the entity pays it. That $70,000–$80,000 state taxes become a federal deduction at the business level. The income flowing through to the owner is already reduced. At a 35%–37% federal tax bracket, that’s easily a $20,000+ difference in federal tax—not because of a different tax rule, but because of how the state tax payment is structured.

Same income. almost the state tax. Completely different federal tax outcome.

Similar opportunities with real estate clients, although this is often overlooked. When properties are held through a partnership or multi-member LLC, the same concept applies. State taxes that would otherwise be paid at the individual level—and limited by the SALT cap—can be shifted to the entity level and deducted before income flows through.

Why Timing Matters More Than People Expect

To utilize PTET effectively, timing is critical. This is not something you decide when filing your tax return.

In California, there are specific requirements that need to be met in the middle the year. The initial payment is generally required by June 15 to qualify for the election. If you missed deadlines, and the opportunity is gone, regardless of whether the election would have made sense. More importantly, PTET is an annual election. It needs to be evaluated each year based on income, cash flow, and overall tax position.

That’s why this needs to be part of year-end planning, not something addressed during tax season.

Final Thoughts

PTET is a good example of something that sits right in the gap between tax compliance and tax planning. On paper, it’s just an election. But in practice, it can have a meaningful impact on your overall tax liability, especially in a high tax state like California. That’s where continues tax planning makes the difference.