Yesterday in part 1, I mentioned that contributing to a retirement plan is the first tax planning strategy to be taking advantage of. Today I want to talk about the second strategy: Pass-Through Entity Tax (PTET).
What is PTET?
If you own a pass-through entity, you know that you pay taxes on that entity’s income on your personal return. If you itemize, since 2018 you’ve only been able to deduct up to $10,000 in state and local taxes (SALT). A PTET allows you to pay your business’s state income tax through your business. This allows you to get a full Federal deduction for those taxes!
What’s the Catch?
First, PTET is determined on a state-by-state basis and not every state has a PTET workaround (see a map here).
Second, the “One Big Beautiful Bill Act” that is currently with the Senate, currently has some provisions that would limit who could take PTET, and would increase the $10K SALT cap. So, the strategies here could all change.
Here is an example:
• Facts: Sarah is an business coach in MA, who owns an S-Corp that had $500,000 in profit in 2024. She files married filing jointly. Her state rate is a flat 5.0%; her Federal marginal rate is 32%.
• Without PTET:
-Business will pay $0 in state taxes
-Sarah will pay $25K in state taxes
-Sarah can only deduct $10K on her Federal return
-She is loosing a $15K deduction
• With PTET:
-Business pays $25,000 in state taxes
-Sarah will pay $0K in state taxes
-Sarah, indirectly, is able to deduct $25K on her Federal return
-She gains a $15K deduction
-In the 32% marginal bracket, that equals ~$5K in tax savings
Strategic Approach:
Given the potential changes in the One Big Beautiful Bill Act, this year it will be important to work with your advisors to make wise decisions around your taxes. Specifically with PTET consider,
• Does my state offer PTET?
• If so, does an election need to be made & if so, what is the deadline?
• For non-resident states that I file in, what is the PTET impact?
• How much would I pay in taxes with\without PTET?
• How will this impact my cash-flow?
• Does the benefit of the federal deduction outweigh potential state-level complexities or double taxation?
• If my business has multiple owners, are we all aligned?
The Bottom Line :
If you’re in a high-tax state and have a profitable business, PTET elections could save you thousands annually. It’s literally a way to convert non-deductible personal expenses into fully deductible business expenses.
Next up, we’ll revisit entity selection