Pass-through entity tax election strategies by state

by | Sep 6, 2025 | Complex Client Situations

Here’s what HIVE AI had to say about “Pass-through entity tax election strategies by state”:

Pass-through entity tax (PTET) election strategies by state

PTET lets partnerships and S corporations pay state income tax at the entity level so owners can receive a federal deduction not limited by the individual SALT cap. Nearly all high-tax states, and many others, now offer PTET. Strategy varies widely by state. Below is a practical framework, followed by a state-by-state playbook for the most common regimes.

Note: The One Big Beautiful Bill (OBBBA) raised the federal SALT cap temporarily starting in 2025, but it did not eliminate PTET benefits or restrict deductibility for PTET payers; PTET remains a viable planning tool, especially for higher earners and for years after the temporary cap expires.

Core federal considerations before choosing a state PTET

Federal deduction mechanics

  • PTET paid by the entity is generally deductible by the partnership/S corp in computing non-separately stated ordinary income, flowing through to owners as lower pass-through income, effectively bypassing the individual SALT cap while the regime is in effect. Coordinate with partner/shareholder basis and state PTET credits/refunds.

Owner mix and residency

  • Owners’ resident states often grant a credit for taxes paid to other states. Some states’ PTET credits are nonrefundable or limited; owners without enough resident tax may waste credits.

Entity structure and income sourcing

  • Sourcing rules differ by state (apportionment vs. allocation, service- vs. market-based). Multi-state operations should model PTET only where nexus and positive state-source income exist.

Cash flow and safe harbors

  • Many states require quarterly estimates at the entity level; missing prepayments can reduce benefits. Refundability varies by state; plan for potential carryforwards.

Compliance complexity

  • Elections are annual in some states and irrevocable once made; others bind for multiple years. Deadlines vary widely and can be as early as the original return due date or even first estimate due date.

Interaction with OBBBA SALT cap changes

  • With the SALT cap increased temporarily beginning 2025 and reverting later, PTET still adds value for high earners, owners above phaseouts, and for the post-sunset period; reassess annually.

State-by-state PTET strategy highlights

Note: The exact rates, credits, eligible entities, election deadlines, and sourcing rules vary and are frequently updated via state guidance. Use this as a planning checklist and confirm current-year instructions before electing.

Alabama

  • Election/Eligibility: Partnerships, S corps. Annual election with return; estimates recommended.
  • Owner credit: Resident credit allowed; confirm refundability.
  • Strategy: Useful for resident owners with Alabama-source income; watch composite vs. PTET interaction.

Arizona

  • Election/Eligibility: Partnerships, S corps. Annual election; entity-level estimates.
  • Owner credit: Generally credit to residents.
  • Strategy: Effective for in-state owners; monitor apportionment for service revenue.

California

  • Election/Eligibility: Partnerships, S corps with consenting owners. Requires elective payment by June 15 for calendar-year entities to maximize benefit; remainder due by original due date.
  • Owner credit: Nonrefundable credit to consenting owners; carryforward allowed.
  • Strategy: Highly valuable but deadline-driven; ensure June 15 prepayment and track owner consents.

Colorado

  • Election/Eligibility: Partnerships, S corps. Annual election on return; estimates required.
  • Owner credit: Resident owner credits available; review refundability.
  • Strategy: Coordinate with Colorado apportionment; model credits for nonresident owners.

Connecticut

  • Election/Eligibility: Mandatory entity-level tax with offsetting owner credit.
  • Owner credit: Credit limited; can produce residual owner tax.
  • Strategy: Mandatory regime—optimize apportionment and estimate timing; review credit limits.

Georgia

  • Election/Eligibility: Partnerships, S corps. Election on timely filed return, irrevocable for year.
  • Owner credit: Resident owner credit; confirm limitation/refundability.
  • Strategy: Run projections where owners have limited GA personal tax to avoid wasted credits.

Idaho

  • Election/Eligibility: Partnerships, S corps. Annual election; estimates.
  • Owner credit: Resident credit generally allowed.
  • Strategy: Straightforward PTET; coordinate with withholding.

Illinois

  • Election/Eligibility: Partnerships, S corps. Election annually; estimates required.
  • Owner credit: Nonrefundable credit with carryforward.
  • Strategy: Watch owners without Illinois liability; may create carryforwards.

Indiana

  • Election/Eligibility: Partnerships, S corps. Annual election.
  • Owner credit: Resident credit; refundability may be limited.
  • Strategy: Consider for resident owners; apportionment key for multi-state.

Kansas

  • Election/Eligibility: Partnerships, S corps. Election with return; estimates encouraged.
  • Owner credit: Generally creditable.
  • Strategy: Review owner residency credit mechanics.

Louisiana

  • Election/Eligibility: Partnerships, S corps. Annual, often treated akin to corporate tax.
  • Owner credit: Credit coordination essential; review refundability.
  • Strategy: Model carefully; cash tax at entity can be material.

Maryland

  • Election/Eligibility: Elective PTET overlays existing nonresident entity tax.
  • Owner credit: Credit provided to residents and nonresidents; refundability nuances.
  • Strategy: Harmonize PTET with mandatory nonresident tax and composite filings.

Massachusetts

  • Election/Eligibility: Partnerships, S corps. Annual election; estimates required.
  • Owner credit: Generally creditable but confirm limits for each owner.
  • Strategy: Effective for high-income owners; model with MA apportionment.

Michigan

  • Election/Eligibility: Partnerships, S corps. Annual election; estimates due.
  • Owner credit: Credit to owners; nonrefundable with carryforward.
  • Strategy: Plan to avoid stranded credits for low-tax owners.

Minnesota

  • Election/Eligibility: Partnerships, S corps. Annual election; estimates.
  • Owner credit: Credit to owners; check refundability.
  • Strategy: Useful in higher-rate years; confirm market-based sourcing for services.

Missouri

  • Election/Eligibility: Partnerships, S corps. Annual election.
  • Owner credit: Credit mechanics can be limiting; verify current-year rules.
  • Strategy: Ensure owners have sufficient MO tax to absorb credits.

New Jersey

  • Election/Eligibility: BAIT for partnerships, S corps. Election by original due date of entity return (generally March 15 for calendar S corps).
  • Owner credit: Credit to owners; nonresident owners may require specific forms.
  • Strategy: Very beneficial but deadline sensitive; ensure timely online election and estimates.

New York

  • Election/Eligibility: Partnerships, S corps. Annual election due by the entity’s March 15 (calendar-year), binding for year.
  • Owner credit: Refundable owner credit (NY resident); nonresident credit depends on reciprocity and other state rules.
  • Strategy: High-value in NY; watch owner residency and multi-state credits. Missing the March 15 election forfeits the year.

North Carolina

  • Election/Eligibility: Partnerships, S corps. Annual election on return; estimates.
  • Owner credit: Resident credit structure; refundability limited.
  • Strategy: Model for owners with low NC liability to avoid stranded credits.

Ohio

  • Election/Eligibility: Partnerships, S corps. PTET interacts with CAT; annual election.
  • Owner credit: Credits for residents; nonresident withholding interplay.
  • Strategy: Model CAT and PTET together; can still be beneficial for owners.

Oklahoma

  • Election/Eligibility: Partnerships, S corps. Annual election.
  • Owner credit: Credit allowed; check limits.
  • Strategy: Useful when owner-level tax is meaningful.

Oregon

  • Election/Eligibility: Limited to certain service businesses with employee payroll thresholds; S corps and partnerships.
  • Owner credit: Credit to owners; confirm caps and refundability.
  • Strategy: Highly fact-specific; may be valuable if payroll criteria met.

Pennsylvania

  • Election/Eligibility: S corps only (partnerships often ineligible); varied local EIT effects.
  • Owner credit: Complicated by local taxes; check refundability.
  • Strategy: Narrow applicability; confirm owner-level benefits before electing.

South Carolina

  • Election/Eligibility: Partnerships, S corps. Annual election.
  • Owner credit: Generally creditable.
  • Strategy: Effective for resident owners; review apportionment.

Utah

  • Election/Eligibility: Partnerships, S corps. Annual election; estimates.
  • Owner credit: Credit with limits.
  • Strategy: Coordinate with Utah sourcing and owner residency.

Virginia

  • Election/Eligibility: Partnerships, S corps. Annual election; entity estimates.
  • Owner credit: Credit with limits; nonrefundable.
  • Strategy: Consider for higher-bracket owners; avoid stranded credit.

Wisconsin

  • Election/Eligibility: Entity-level tax regime for S corps and partnerships; binds entity into C-corp-like computation unless using specific elective regime.
  • Owner credit: PTET credit to owners; strong for residents.
  • Strategy: High benefit for resident owners; ensure you choose the elective regime intended.

Advanced planning tips

Multi-state owners

  • Elect PTET only in states where owners get full or refundable credits. If resident credits are limited, consider owner-specific opt-in states (where allowed) or refrain in those states.

Composite returns vs. PTET

  • In some states, composite withholding can interact with PTET. Optimize for overall cash tax and credits; avoid double paying or creating nonrefundable overpayments.

Quarterlies and prepayment rules

  • States like CA and NY require early or strict prepayments. Calendar these to preserve deductibility and avoid penalties.

Sourcing and apportionment

  • Service providers should model market- vs. cost-of-performance sourcing. Shifts in revenue sourcing can materially change PTET benefits.

Partner/Shareholder agreements

  • Amend agreements to address PTET elections, owner consents, indemnities, cash call mechanics, and allocation of PTET benefits/costs.

Federal reporting hygiene

  • Track entity-level deductions correctly, reconcile owner basis, and align state PTET credits to avoid mismatches that can trigger underpayment notices.

Process to decide and implement each year

1) Gather facts

  • Owners’ residency and marginal rates
  • State-source/apportioned income by state
  • Entity eligibility and owner consent requirements
  • State credit refundability and carryforward rules

2) Model scenarios

  • With and without PTET by state
  • Include federal deduction value, state owner credit timing, cash flow, and potential stranded credits

3) Calendar deadlines

  • Election and prepayment dates (e.g., CA June 15, NY March 15)
  • Quarterly estimates and true-up timelines

4) Update governing docs

  • Insert PTET election and payment provisions; set owner consent thresholds

5) Execute and monitor

  • Make elections, fund estimates, and track credits to owners; reconcile on K-1s and state K-1 equivalents

Special federal notes and related authorities

  • PTET payments are entity-level state taxes; they are generally deductible at the entity level and reduce income passing to owners for federal purposes, which can interact with various federal rules. While there is no single federal regulation “on PTET,” the entity-level deduction concept fits within general rules for ordinary and necessary business expenses and entity-level taxes. For specified pass-through entities, IRS guidance has provided safe harbors for certain state tax credit structures in analogous contexts, emphasizing that the entity must be directly subject to a state or local tax to claim a business deduction. 1
  • Entity classification and elections matter for pass-through treatment; ensure the entity is properly classified as a partnership or S corporation for federal purposes. 2
  • If using a non-calendar tax year (rare for pass-throughs), coordinate election timing with a valid section 444 election. 3
  • The IRS maintains a Pass-Through Entities Practice Area; complex structures can draw scrutiny, so maintain robust documentation of elections, calculations, and owner credits. 4

Want a tailored PTET plan?

Tell me:

  • Entity type(s), states with nexus, and where owners reside
  • Estimated 2025–2026 state-source income by state
  • Whether owners can use nonrefundable credits in their resident states
  • Your compliance capacity for early prepayments (e.g., CA, NY)

I’ll build a state-by-state election matrix, model federal and state cash taxes, and calendar your required estimates and filings.

Sources

1 – T.D. 9907 📄 Summarize
2 – IRS – Form 8832 Entity Classification Election 📄 Summarize
3 – IRS – Form 8716 Election to Have a Tax Year Other Than a Required Tax Year 📄 Summarize
4 – IRS.gov – Large Business and International (LB&I) Division 📄 Summarize

Try Your AI Tax Assistant for Free!

Ready to transform your practice with agentic AI in tax? See firsthand how our cutting-edge AI tax tools can revolutionize your approach to tax research and planning.

Create Your Free Account