Business owners across the United States are constantly seeking effective strategies to minimize tax liability and maximize after-tax income. One of the most talked-about tax strategies in recent years is the Pass-Through Entity Tax (PTET) deduction, a response to the federal $10,000 cap on state and local tax (SALT) deductions imposed by the 2017 Tax Cuts and Jobs Act (TCJA). As more states adopt PTET regimes, new federal developments—like the OBBB (often referencing legislative efforts to override IRS Notice 2020-75 or a prospective “Other Backstop Bill”)—have created both opportunities and new questions for taxpayers.
At America’s Tax Defender, our team of ex-IRS agents, LLM tax attorneys, and seasoned CPAs provides up-to-the-minute guidance on PTET deductions and other business tax planning strategies to clients in all 50 states. In this comprehensive guide, we explain:
- What is a PTET deduction?
- Why was it created, and who benefits?
- What changes does the OBBB bring, and how should businesses respond?
- Step-by-step compliance for claiming PTET deductions
- Pitfalls, documentation tips, FAQs, and actionable next steps
Whether your business is navigating tax planning, tax filing, IRS disputes, or state audits, understanding PTET is essential.
What Is a PTET Deduction?
PTET Defined: The Basics
The Pass-Through Entity Tax (PTET) is a state-level tax regime that allows partnerships and S corporations (“pass-through entities”) to elect to pay state income tax at the entity level rather than the individual owner level. This election creates a federal deduction for state and local taxes paid by the entity—effectively bypassing the federal $10,000 SALT deduction cap for individual owners.
Who Benefits?
– Owners of partnerships, LLCs, and S corporations in participating states
– High-income earners most affected by the SALT deduction cap
Why Was PTET Created?
The TCJA’s $10,000 SALT cap hit owners in high-tax states particularly hard. PTET programs, beginning with Connecticut in 2018 and followed by states like New York, California, and New Jersey, offer a workaround—giving business owners a fully deductible expense at the entity level rather than a capped deduction on their personal returns.
Key Resource:
What is a Business Tax Deduction vs. a Tax Credit?
The Federal Response: IRS Notice 2020-75 and OBBB
IRS Notice 2020-75
In late 2020, the IRS issued Notice 2020-75, confirming that pass-through entities could deduct state and local taxes paid at the entity level, legitimizing the PTET workaround for federal tax purposes.
What Is the OBBB?
The term “OBBB” typically references the Overruling or Overriding Backstop Bill, proposed federal legislation intended to address, clarify, or even limit the benefits of PTET elections following IRS Notice 2020-75. As of 2025, Congressional debate continues about whether to:
- Make the PTET deduction permanent
- Expand, restrict, or modify eligibility
- Address perceived inequities between states
Recent Developments:
For up-to-date legislative updates and changes for 2025, visit
Tax Changes in 2025.
How Does the OBBB Affect PTET Deductions?
Key Potential Changes
If enacted, an OBBB or similar bill could:
- Clarify eligibility: Specify which entities/states qualify for PTET deductions
- Change deduction limits: Raise, lower, or eliminate the deduction at the federal level
- Retroactive application: Affect previous tax years, creating refund or liability opportunities
- Add compliance requirements: More robust disclosure and documentation for businesses
Practical Impact for Business Owners
- Current Tax Year: PTET deductions remain available in most participating states, as long as IRS Notice 2020-75 stands.
- Future Years: If Congress acts, there could be retroactive or prospective changes—potentially impacting 2024 and 2025 filings.
- Audit Risk: As with any “workaround,” IRS scrutiny is likely to increase if Congress modifies the rules. Careful documentation and professional support are essential.
Step-by-Step: How To Claim a PTET Deduction
- Confirm State Participation and Election Deadline
Check if your state offers a PTET election (as of 2025, over 30 states do). Election deadlines and filing procedures vary—late or missed elections can forfeit the deduction.
- Make the PTET Election
Follow your state’s specific process. Some states require annual elections, others are binding for multiple years. Coordinate with your accountant or tax attorney to ensure proper documentation.
- Calculate and Pay the Entity-Level Tax
Determine state taxable income and PTET rate. Make estimated payments as required by your state.
- Deduct the Payment Federally
Deduct the full PTET paid on the entity’s federal return, typically on Form 1065 (partnerships) or 1120-S (S corporations).
- Allocate the State Credit to Owners
Owners typically receive a credit on their state returns for their share of PTET paid. This prevents double taxation at the individual level.
See our
Business Tax Filing
and
Tax Compliance
guides for step-by-step filing checklists.
Compliance, Documentation & Avoiding Pitfalls
- Document the Election: Keep minutes/resolutions, election forms, and payment records.
- Track Owner Allocations: Maintain clear schedules showing how PTET is allocated among owners.
- Monitor Legislative Updates: Be prepared for retroactive changes if an OBBB passes.
- Work With Professionals: IRS audits may target PTET deductions, especially if legislative changes occur. Consult a business tax controversy specialist for support.
Real-World Example
Scenario:
An S corporation in New York with three owners elects PTET for 2024. The entity pays $50,000 in New York State PTET. On the federal return, it deducts the full $50,000, saving owners from the $10,000 SALT cap. Each owner receives a credit for their share of PTET on their NY individual returns.
If the OBBB passes:
If Congress applies changes retroactively, owners may have to adjust prior returns. If Congress eliminates the PTET workaround, the entity can no longer deduct state taxes at the entity level after the effective date.
Frequently Asked Questions (FAQs)
Is PTET available in all states?
No. Over 30 states offer PTET, but rules vary widely.
Business Tax Planning
is essential for multi-state entities.
Can a sole proprietor elect PTET?
No. PTET is only for partnerships and S corporations.
Will I lose my PTET deduction if the law changes?
You could be impacted retroactively or prospectively. Work closely with your tax advisor and monitor legislative developments at Tax Changes in 2025.
What documentation does the IRS expect?
Election forms, payment records, state confirmations, owner allocations, and meeting minutes. See our Tax Analysis service.
Actionable Next Steps
- Review Your Entity Type and State Laws: Work with a tax professional to determine eligibility.
- Coordinate with Your Tax Advisor: Elections, payments, and documentation must be handled precisely.
- Stay Current on Legislative Changes: Subscribe to updates or contact our team for breaking news.
- Prepare for IRS Scrutiny: With changing laws, professional representation is vital. If facing an audit, see our Business Tax Audits service.
Why Choose America’s Tax Defender?
At America’s Tax Defender, you benefit from a powerhouse team featuring ex-IRS agents who understand audit risk and compliance, LLM tax attorneys with advanced expertise in multi-state tax law, and CPAs who are deeply experienced in PTET and federal business tax planning. We help businesses nationwide navigate every stage of the tax lifecycle—from entity selection to proactive planning, filing, and IRS dispute resolution. Ready to maximize your PTET deduction and confidently prepare for upcoming federal tax law changes? Contact America’s Tax Defender today to schedule a confidential consultation with our industry-leading team. Schedule a Consultation
