In high-tax states across America, business owners have watched their state and local tax deductions shrink under federal caps. Pass-through entity tax elections may have emerged as a SALT cap workaround to help preserve deductions, but recent legislative proposals threaten to reshape these strategies.

In this article, we’ll explore PTE election benefits, eligibility requirements, and how Harness can help tax advisors manage the changing SALT cap arena more effectively.

Key takeaways

Table of Contents

  1. Understanding the SALT cap in 2025
  2. How PTE SALT cap workarounds function
  3. What states have adopted PTE tax?
  4. Benefits of PTE elections for business owners
  5. Determining eligibility for PTE elections
  6. Timing considerations for PTE elections
  7. Key differences in state PTE implementations
  8. Recent legislative developments affecting PTE strategies
  9. Practical considerations for tax advisors
  10. How Harness can help

Understanding the SALT cap in 2025

Under the One Big Beautiful Bill Act, the SALT deduction cap has undergone its most profound change since its inception. What started as a $10,000 limit under the Tax Cuts and Jobs Act now stands at $40,000 for 2025, offering welcomed breathing room for many taxpayers.

The relief is not universal, though. High-income taxpayers face a phased-down cap once their modified adjusted gross income crosses $500,000. For some, this means watching their deduction shrink back toward the original $10,000 limit, effectively nullifying the temporary expansion’s benefits.

Despite this apparent relaxation of restrictions, pass-through entity tax elections retain their strategic value, particularly for business owners wrestling with significant state tax obligations.

How PTE SALT cap workarounds function

At its core, the pass-through entity tax election performs an elegant shift in tax burden. Instead of individual owners bearing state income taxes personally, the entity itself shoulders this responsibility. More than just an accounting technicality, it’s a fundamental restructuring that preserves deductibility at the federal level.

Most states have crafted their implementations with careful attention to avoiding double taxation. When the entity pays state taxes, owners receive corresponding tax credits against their personal state tax obligations. The math works out cleanly: what the entity pays, the owners don’t have to pay again.

While individual SALT deductions face strict federal caps, entity-level tax payments reduce business income before it reaches owners’ personal returns. The business essentially absorbs these taxes as a deductible expense, flowing through reduced income to its owners.

This structure yields a clear economic benefit: state taxes that would otherwise bump against individual SALT caps become fully deductible at the federal level. For many business owners, this translates into major tax savings without requiring complex operational changes.

What states have adopted PTE tax?

As of early 2025, 36 states plus New York City have adopted some form of PTE tax. These include:

Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York (and New York City), North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin.

Expiration dates and sunset provisions

The design of these laws often ties their duration to the federal SALT cap, which was made permanent under recent federal legislation (though temporarily raised to $40,000 in 2025, $40,400 in 2026, and then phased back to $10,000 by 2030). As a result, some state laws automatically end if the cap is repealed, while others have explicit sunset dates.

States with PTETs tied to the federal SALT cap:

These states’ tax laws will expire if the federal SALT deduction cap is ever removed.

States with explicit expiration dates:

Without legislative renewal, PTE taxes in these states will not be available for 2026.

Benefits of PTE elections for business owners

The main appeal of PTE elections is their ability to recapture otherwise lost federal deductions. In high-tax states, where individual state income taxes can far exceed the SALT cap, this benefit becomes particularly valuable for business owners in higher income brackets.

What makes these elections especially attractive is their efficiency. Unlike many tax planning strategies that require major business restructuring or operational changes, PTE elections typically work within existing business frameworks.

Beyond pure SALT cap avoidance, some PTE structures offer additional advantages. Partnership arrangements, in particular, may find opportunities to reduce self-employment tax exposure through careful structuring of their PTE elections.

Another benefit is the impact on cash flow management. Instead of treating state tax payments as personal obligations, incorporating them into regular business operations helps many find improved predictability in their tax planning.

Determining eligibility for PTE elections

Professional woman standing beside a flip chart in a modern meeting room, delivering a presentation to colleagues.

Although many business structures qualify for PTE elections, important limitations apply to eligibility. S corporations, partnerships, and many limited liability companies taxed as pass-through entities typically qualify. C corporations, however, remain exempt.

Most states impose a key requirement that often proves challenging: unanimous consent among owners. For entities with numerous owners or diverse ownership interests, securing this consensus can be a major hurdle.

Single-member LLCs also face restrictions. Unless they have elected S corporation status for tax purposes, these entities typically can’t benefit from PTE elections—a limitation that stems from them being considered “disregarded entities” for federal tax purposes.

Professional service firms, despite facing limitations under Section 199A as specified service trades or businesses, generally maintain their eligibility for PTE elections across most implementing states. This preserves an important planning opportunity for law firms, medical practices, and similar professional organizations.

However, state-specific qualifying criteria add another layer of complexity. Some jurisdictions impose additional requirements based on owner residency status, entity size, or the nature of business activities conducted within state boundaries—variations that require careful attention when evaluating election eligibility.

Timing considerations for PTE elections

The annual nature of PTE elections creates recurring decision points for business owners and their tax advisors. Most states require these elections either by a specific calendar deadline or in conjunction with the filing of the entity’s tax return. This cyclical requirement means the benefits and costs of an election need to be regularly reassessed.

Estimated tax payment requirements vary dramatically across jurisdictions. Some states maintain strict quarterly payment schedules for PTE taxes, mirroring individual estimated tax requirements. Others offer more flexibility, allowing annual settlements when returns are filed.

Key differences in state PTE implementations

State credit mechanisms vary a great deal in their implementation. Some jurisdictions offer refundable credits, providing maximum flexibility for owners. Others restrict credits to current-year tax liabilities without carryforward provisions, potentially limiting their value.

Non-resident owner treatment also presents challenges across different states. Some jurisdictions exclude non-resident income from PTE calculations entirely, while others maintain separate non-resident withholding requirements despite the election. These variations can significantly complicate planning for businesses with multi-state operations.

States without individual income taxes, like Texas, Florida, and Nevada, face particular scrutiny under proposed federal legislation. These jurisdictions may see their PTE deductions disallowed, creating additional complexity for businesses operating across state lines.

Multi-state operations face perhaps the most complex analysis requirements. Operating across jurisdictions with conflicting PTE approaches, managing owners who reside in states without reciprocal credit provisions, or dealing with inconsistent filing deadlines requires sophisticated planning.

Recent legislative developments affecting PTE strategies

The most significant development is the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025. This federal legislation makes PTE tax deductions permanent and increases the federal SALT cap from $10,000 to $40,000 for tax years 2025 through 2029. Although this is a major win for high-income taxpayers in high-tax states, it doesn’t remove the need for PTE taxes.

In response to the federal changes, states are making their own adjustments. California, for instance, extended its elective PTE tax through 2030, a move contingent on the federal SALT cap extension. Conversely, some states, like Illinois and Utah, have PTE tax laws set to expire at the end of 2025. Without further legislative action, these states would no longer offer the PTE tax in 2026.

Practical considerations for tax advisors

Given the nuances of tax legislation and their propensity for change, comparing scenarios with and without PTE elections is essential. The temporary nature of the increased SALT cap, combined with potential legislative changes to PTE workaround acceptability, makes multi-year projections increasingly important.

Beyond pure tax savings, documenting business purpose takes on additional importance. As PTE elections face increased scrutiny under proposed anti-avoidance provisions, maintaining clear records of legitimate business reasons for these elections may help strengthen positions against potential challenges.

How Harness can help

Businessman and businesswoman shaking hands in a modern office—symbolizing agreement and strategic partnership.

Given the complexity of the PTE election arena, it’s important that tax advisors not only stay informed but adopt the technologies needed to streamline their operations. Using the technologies offered by Harness, for example, allows tax advisors to sidestep time-consuming day-to-day administrative tasks, leaving them with far more time to spend creating tax strategies for their clients.

The Harness platform combines automated data extraction, intelligent reminder systems, and professional tax data verification services to help advisors confidently manage sophisticated tax planning strategies. With SALT cap rules continuing to shift and with state implementations remaining varied, having the right tools can help ensure you maximize available deductions for your clients while remaining fully compliant. Get started with Harness and deliver more value to your clients.

Disclaimer:

Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.

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