Why it matters
Individuals face a cap on the federal deduction for state and local taxes: $40,000 for tax year 2025, phased down above $500,000 of income to a $10,000 floor, and indexed after 2025. The entity-level deduction is not subject to that cap, which is why owners ask for it. Check each state's election deadline and estimate schedule.
Example
Assume a two-partner LLC taxed as a partnership pays $40,000 of state PTET for the year. The entity deducts the $40,000 on Form 1065, so each partner's K-1 income drops by $20,000, and each partner claims the state credit of $20,000 instead of itemizing it under the cap.
Related terms
Questions about Pass-through entity tax
Does the federal government allow the entity to deduct PTET?
The IRS said in Notice 2020-75 that state and local income taxes paid by a partnership or S corporation are allowed as a deduction in computing its non-separately stated taxable income or loss for the year of payment. The notice also says Treasury and the IRS intend to issue proposed regulations, so confirm current guidance before you file.
What should a firm collect from a client for a PTET election?
Ask for the state election confirmation, every estimated or extension payment with its date and amount, the entity's state PTET statement, and each owner's share of the credit. A client who says the election was made last year should be asked for proof, because most states require a new election each year.