If you're a business owner in the United States, there's a chance that your business is classified as a “pass-through entity,” as is often the case for LLCs, partnerships, and even S corporations. In the 30 or so states where pass-through entity tax (PTET) is offered, this classification can help you bypass certain caps on state and local tax (SALT) deductions—but the rules have become increasingly complex.
The good news? With a deeper dive into how PTET and SALT deductions work, you can plan your business taxes more strategically and potentially keep more of your hard-earned money in your own pocket.
Understanding Pass-Through Entity Taxes
Specifically, a pass-through entity tax occurs when the profits from a business are “passed through” to their owners, who then pay taxes on their personal returns rather than filing a business tax return at the federal level. This is a common arrangement for many types of businesses, ranging from LLCs to S corporations.
At the same time, PTETs can become increasingly complicated when state and local taxes come into play. Under federal law, deductions on state and local taxes are capped at $10,000 per year. For some businesses paying significantly more in state and local taxes, the inability to claim a full deduction can have major financial impacts.
Changes and Updates Under OBBBA
In July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law—and one of the major provisions of this law was an increase in the SALT cap from $10,000 to $40,000. However, this cap is scheduled to be reduced by 1% each year, so it's not a permanent move. Likewise, taxpayers with a modified adjusted gross income (AGI) of more than $600,000 cannot claim the full amount.
Because of these changes, many states have gone on to implement and update their own laws regarding PTETs in an effort to make state and local taxes less burdensome on business owners. Specifically, with PTET laws in place, qualifying business owners in some states may be able to pay their state income tax as a business and forgo SALT deduction caps altogether. This, in turn, could help lower tax burdens by a significant amount.
Other Complexities
For business owners in states with PTET laws in place, taking advantage of these laws could be a great way to cut down on business taxes owed at the state and local levels. At the same time, because individual states have their own PTET laws and regulations in place, following these requirements can be complicated.
Consider, for example, that not all states allow for a PTET election by business owners. And even in the states where this is allowed, there may be strict deadlines in place for when business owners need to make a PTET election and make estimated tax payments. Likewise, business owners who live in a different state than where their business officially operates could run into other challenges.
Practical Tips for Business Owners
If you're a business owner looking to navigate the complexities of SALT deductions and PTET laws, there are a few things you can do to make the process a bit easier on yourself.
For starters, review the current legal structure of your business. If you have an LLC, partnership or S corporation, there's a good chance you could qualify for a PTET election, if your state offers one.
Before you jump blindly into making a PTET election, however, it's still important to analyze the potential tax savings you'll enjoy—along with any possible drawbacks (such as added administrative burden) that may come along with claiming it. Only from there should you make an informed decision regarding whether the PTET election makes logical sense for your business to take.
The Final Word on Pass-Through Entity Taxes
Sometimes, figuring out whether to take a PTET election (where available) isn't so cut-and-dry. If your situation is more complex and you're having a hard time deciding what option is best for you, please contact our Tax Services team.