How the PTE Election Helps High Earners Legally Work Around the SALT Cap
The State and Local Tax (SALT for short) deduction cap has frustrated business owners and high-income earners since 2018. But there is a legal and IRS-respected strategy that can help reclaim lost deductions: the Pass-Through Entity (PTE) tax election.
Originally introduced by states in response to the federal Tax Cuts and Jobs Act of 2017, the PTE election allows qualified businesses to shift state income tax from the individual level to the entity level—restoring deductibility and reducing federal taxable income.
The PTE election remains one of the most effective ways to mitigate the SALT cap for business owners, even under recent tax changes.
So What is the PTE Election and Why Does It Matter?
The SALT deduction was previously capped at $10,000 for individuals on their federal tax return. Beginning in 2025, the SALT cap increases to $40,000 for married filing jointly taxpayers—but only for households with federal adjusted gross income under $500,000. Above that threshold, the $40,000 cap phases down quickly, reducing the benefit for high-income taxpayers. For high earners in high-tax states, this is a significant limitation.
The PTE election changes that by allowing S corporations and partnerships to pay state tax at the business level. Because state tax paid by the business is treated as a federal business expense, it becomes fully deductible—bypassing the SALT cap on personal returns.
In simple terms:
Without PTE – You personally pay state tax and lose deduction above $10,000.
With PTE – Your business pays the tax and deducts it fully.
The result is lower federal taxable income for business owners.
Who Qualifies for the PTE Election?
Eligibility depends on state law, but generally:
Requirement Details
Entity Type Partnerships, LLCs taxed as partnerships, and S corporations
Ownership Some states restrict eligibility based on ownership structure
Consent Some states require unanimous or majority owner approval
Filing Status Must elect PTE by deadline, usually annually
Publicly traded partnerships and sole proprietorships do not qualify.
Who Benefits the Most from the PTE?
While OBBBA temporarily increased the SALT cap, PTE planning is still essential if you:
Earn more than $500,000 per year
Live in a high-tax state (CA, NY, NJ, MA, IL, CT, MN)
Own a partnership, S corporation, or LLC taxed as one
Want to reduce federal taxable income legally
This strategy is not one-size-fits-all. Modeling, timing, and entity structure matter.
Final Takeaway
The PTE election is not a loophole. It is intentional legislation created by states to protect business owners from limitations imposed by the federal SALT cap. When executed correctly, it can produce meaningful savings every year.
But like all planning strategies—it only works if it is implemented correctly.
The One Big Beautiful Bill Act offers modest SALT relief—but only for taxpayers under $500,000 in income. The moment you cross that threshold, the benefit phases down quickly, and high earners once again lose meaningful deductions.
The PTE election bridges that gap. When executed correctly, it restores deductibility at the entity level, reduces federal taxable income, and produces meaningful savings every year.
If you want clarity on whether the PTE election fits into your tax strategy, we can help you evaluate eligibility, state rules, and potential savings.
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