How the PTET election works.
The business pays your state income tax, deducts it federally, and you get a credit or exclusion on your state return. Here’s how that works for 2026, what the new SALT cap changes, and what to weigh before electing. For your state’s rules, see the state guides.
What PTET is
Normally, the profit from an S corporation or partnership passes through to the owners, and each owner pays state income tax on their share. Those state taxes count toward the federal cap on state and local tax (SALT) deductions, so above the cap they save nothing on your federal return.
A pass-through entity tax flips who pays. The business elects to pay state income tax on the owners' shares itself. The business deducts that tax on its federal return like any other business expense, which lowers the income that flows to the owners. The owners then get a credit or an income exclusion on their state return, so the state does not tax the same income twice.
The result: roughly the same state tax, paid by a different taxpayer, and a federal deduction that the SALT cap does not reach.
An example
Say you own an S corporation that earns $800,000, and your state's PTET rate is 5%. The state tax on that income is $40,000 either way.
| Without PTET | With PTET | |
|---|---|---|
| Who pays the $40,000 | You, on your state return | The S corporation |
| Federal treatment | An itemized SALT deduction, limited by the cap | A business deduction, so $40,000 less income on your K-1 |
| Your state return | Tax on $800,000 | Credit for the tax the business paid |
At that income your 2026 SALT cap is $10,000 (see below), and property taxes often use it up. Without the election, none of the $40,000 is deductible federally. With it, the full $40,000 comes off your federal income, worth about $14,800 at the 37% bracket. The exact number depends on your state's rate and credit rules, which is why each state guide below matters.
The 2026 SALT cap
The 2025 federal tax law (Public Law 119-21) raised the SALT cap from $10,000 to $40,000 for 2025 and $40,400 for 2026 ($20,200 if married filing separately). It rises 1% a year through 2029, then returns to $10,000 in 2030.
The higher cap phases down for high earners. It shrinks by 30% of your modified adjusted gross income above $505,000 for 2026 ($252,500 married filing separately), but never below $10,000. So in 2026 the cap is back to $10,000 once your modified AGI reaches about $606,000.
- Income well above $606,000: the cap is $10,000, and PTET works as it did before 2025.
- Between $505,000 and $606,000: the PTET deduction also lowers your AGI, which can restore part of the higher cap. These cases need a side-by-side calculation.
- Below $505,000: if your state income and property taxes fit under $40,400, you may already deduct them in full, and the election adds less. It can still help if you take the standard deduction, since a business deduction works either way.
The law that passed kept the PTET deduction intact. An earlier House version would have limited it for many service businesses, but that language did not make the final bill.
The federal rules
The IRS blessed the approach in Notice 2020-75. It says a state income tax imposed on a partnership or S corporation, including one the entity elects into, is deductible by the entity in computing its non-separately stated income. The deduction reaches owners through their K-1 income instead of as an itemized deduction, so it does not count against their SALT cap. The notice applies to payments made on or after November 9, 2020.
Two points follow from it. The notice ties the deduction to the year the business makes the payment, so timing matters around December 31. And it covers tax imposed on the entity itself, not owners' personal taxes paid out of business funds.
How elections work
Every state writes its own rules, but most follow the same shape:
- The business elects. Usually on the entity's return or a separate form, for one year at a time. Deadlines range from early in the tax year (New York's 2026 deadline was March 16, 2026) to the extended due date of the return the following fall.
- The business pays. Many states require quarterly estimates from the entity. A few tie the election itself to a payment: Utah's election only counts if the tax is paid by December 31.
- The business files. It reports the tax on its state return and gives each owner a K-1 or schedule showing their share of the tax paid.
- The owners claim the benefit. Each owner takes a credit (or excludes the income) on their personal state return, and lowers their own estimated payments to match.
Rates and deadlines
The 2026 rate and election deadline for a calendar-year business in every state with a PTET. Click a state for who can elect, estimated payments, how owners claim the credit, and the state's own forms.
| State | Rate for 2026 | Deadline to elect | Owner benefit |
|---|---|---|---|
| Alabama | 5% | With the return: March 15, 2027, or September 15, 2027 if extended | Refundable credit |
| Arizona | 2.5% | With the return (March 15, 2027), or on an amended return within four years | Nonrefundable credit |
| Arkansas | 3.7% (1.85% on capital gains) | By the return due date, including extensions (April 15, 2027 original) | Exclusion |
| California | 9.3% | On the timely filed original return (March 15, 2027, or later if extended) | Nonrefundable credit |
| Colorado | 4.4% | During 2026, or with the return (April 15, 2027, or October 15, 2027 if extended) | Refundable credit |
| Connecticut | 6.99% | By the return due date: March 15, 2027, or September 15, 2027 if extended | Refundable credit |
| Georgia | 4.99% | By the return due date: March 15, 2027, or September 15, 2027 if extended | Exclusion |
| Hawaii | 9% | Form N-362E by April 20, 2027, or October 20, 2027 if extended | Nonrefundable credit |
| Idaho | 5.3% | On the original 2026 return | Refundable credit |
| Illinois | 4.95% | On the return; irrevocable after October 15, 2027 | Refundable credit |
| Indiana | 2.95% | By the earlier of the return due date (with extensions) or the date the return is filed | Refundable credit |
| Iowa | 3.8% | November 1, 2027 (six months after the return due date) | Refundable credit |
| Kansas | 5.58% | On the return as filed: April 15, 2027, or October 15, 2027 if extended | Refundable credit |
| Kentucky | 3.5% | April 15, 2027, or October 15, 2027 if extended | Refundable credit |
| Louisiana | 3% | Form R-6980 by April 15, 2027; stays in effect until ended | Exclusion |
| Maine | 7.15% | On the timely filed return (March 15, 2027, plus any extension) | Refundable credit |
| Maryland | 8.75% for individual members, 8.25% for entity members | With the first filing or payment after April 15, 2026 (2026 only) | Refundable credit |
| Massachusetts | 5%, plus an optional 4% above $1,107,750 per member | On the return with Form 63-ELT (up to September 15, 2027 if extended) | Refundable credit |
| Michigan | 4.25% | September 30, 2027, binding for three years | Refundable credit |
| Minnesota | 9.85% | By the return due date, including extensions (September 15, 2027 if extended) | Refundable credit |
| Mississippi | Up to 5% (2025 schedule) | During the year or by the return due date (March 15, 2027, or September 15, 2027 if extended) | Refundable credit |
| Missouri | 4.7% | On a timely Form MO-PTE: April 15, 2027, or later if extended | Nonrefundable credit |
| Montana | 5.65% | September 15, 2027 (extended due date of Form PTE) | Refundable credit |
| Nebraska | 4.55% | By the return due date, including extensions (March 15, 2027 original) | Refundable credit |
| New Jersey | 5.675% to 10.9% | March 15, 2027, before any payment | Refundable credit |
| New Mexico | 5.9% (2025 rate) | On the return: March 15, 2027 | Refundable credit |
| New York | 6.85% to 10.9%, plus 3.876% NYC PTET | March 16, 2026 (passed). From 2027: September 15 | Refundable credit |
| North Carolina | 3.99% | On the timely filed return: April 15, 2027, or later if extended | Exclusion |
| Ohio | 3% | With Form IT 4738: April 15, 2027, or September 15, 2027 if extended | Refundable credit |
| Oklahoma | 4.5% for individual members, 4% for entity members | On the timely filed return; stays in effect until revoked | Exclusion |
| Oregon | 9% to 9.9% | With Form OR-21: April 15, 2027, or October 15, 2027 if extended | Refundable credit |
| Rhode Island | 5.99% | On the return with Schedule PTE: March 15, 2027 | Refundable credit |
| South Carolina | 3% | By the return due date: March 15, 2027, or September 15, 2027 if extended | Exclusion |
| Utah | 4.45% | December 31, 2026 (pay the tax by year end) | Nonrefundable credit |
| Virginia | 5.75% | With Form 502PTET: April 15, 2027, or October 15, 2027 if extended | Refundable credit |
| West Virginia | 4.58% | March 15, 2027 per the Tax Division (statute: return due date with extensions) | Nonrefundable credit |
| Wisconsin | 7.9% | By the extended return due date (September 15 or October 15, 2027) | Exclusion |
States without a PTET
No elective PTET
- Delaware. No elective PTET. A Delaware partnership is not itself subject to tax, and its partners pay Delaware personal income tax on their shares (the 2022 PTET proposal, House Bill 489, died in committee). Delaware Division of Revenue, TY2024 Form PRT-RTN instructions
- Pennsylvania. No elective PTET. Pennsylvania taxes owners directly on their share of partnership and PA S corporation income, and the proposed elective PTET (Senate Bill 396 of 2025) has sat in the Senate Appropriations Committee since April 2, 2025. Pennsylvania General Assembly, Senate Bill 396 (2025-2026 session) history
- North Dakota. No elective PTET. North Dakota taxes owners on their share of passthrough income, and the 2025 Form 58 partnership return shows only nonresident withholding and composite tax lines, with no entity-level election. North Dakota Office of State Tax Commissioner, 2025 Form 58
- Vermont. No elective PTET. Bills to create one (S.45 in 2023, and a 2026 amendment to S.282) were never enacted, and the Department of Taxes' summary of 2026 legislation lists no PTET. Vermont Department of Taxes, 2026 Legislative Highlights
- Washington D.C.. No elective PTET. Partnerships and other unincorporated businesses with more than $12,000 of gross income generally pay D.C.'s unincorporated business franchise tax at the entity level on Form D-30. S corporations are treated as C corporations in D.C. and pay the corporation franchise tax on Form D-20. D.C. Office of Tax and Revenue, 2024 Form D-65 instruction booklet
- Tennessee. No elective PTET. Tennessee has no personal income tax, and its franchise and excise taxes are already imposed at the entity level on corporations, limited partnerships, LLCs, and business trusts. Tennessee Department of Revenue, Franchise and Excise Tax
- New Hampshire. No elective PTET. New Hampshire has no tax on wages, and its Business Profits Tax (7.5% for periods ending on or after December 31, 2023) is already imposed at the entity level on every business organization, including partnerships and LLCs. New Hampshire RSA 77-A:1 and 77-A:2 (Business Profits Tax)
No personal income tax
Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming have no personal income tax on business income, so there is nothing for a PTET to shift. If you live in one of these states but your business earns income in a state that does tax it, that state's PTET may still apply to you as a nonresident owner.
Tradeoffs to weigh
- A smaller QBI deduction. The PTET is a business deduction, so it generally lowers qualified business income and with it the 20% QBI deduction, where you qualify for one.
- Credits in your home state. If you live in one state and the business pays PTET in another, check how your home state treats the other state's PTET. Credit rules vary from state to state.
- Cash flow. The business pays the tax, often in quarterly estimates, before owners would have paid it. Distributions may need to shrink to match.
- Unequal owners. When owners live in different states or some owners opt out, the tax is not paid evenly. S corporations must keep distributions proportional, so the operating agreement and payment plan need to handle this.
- Nonrefundable credits. In some states, unused credit carries forward rather than coming back as a refund.
Before you elect
- Run your federal return both ways, with and without the election, including the SALT cap phase-down and QBI.
- Find your state's election deadline and any prepayment rule in its state guide.
- Confirm every owner's home state will credit the tax.
- Set up the entity's estimated payments and lower each owner's personal estimates to match.
- Make sure the payment for each year clears by December 31 if you want the deduction in that year.
- Tell your CPA before year end, not at filing time.
Official sources
Checked October 2026. Each state guide lists its own sources.
- IRS Notice 2020-75
- Public Law 119-21, Section 70120 (SALT cap)
- IRS, 2026 SALT deduction amounts (Form 1040-ES correction)
This guide is for general education and reflects rules as of October 2026. Tax law and agency websites change, and your situation may have details that change the answer. Please talk with your tax professional before acting on it.