{"id":1403,"date":"2024-02-21T14:32:57","date_gmt":"2024-02-21T14:32:57","guid":{"rendered":"https:\/\/wcginc.com\/?p=1403"},"modified":"2026-01-26T16:36:35","modified_gmt":"2026-01-26T16:36:35","slug":"pass-through-entity-tax-deduction","status":"publish","type":"post","link":"https:\/\/wcginc.com\/blog\/pass-through-entity-tax-deduction\/","title":{"rendered":"Pass-Through Entity Tax Deduction"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68f6985ce23b6\" class=\" wd-rs-68f6985ce23b6 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<div class=\"overview\">\n<h2><span class=\"ez-toc-section\" id=\"Key_Takeaways\"><\/span>Key Takeaways<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li>Pass-through entity tax (PTET) allows you to pay for your state income tax with business funds, reducing your federal income tax.<\/li>\n<li>PTET acts as a workaround for the $10,000 SALT deduction limit introduced by the Tax Cuts and Jobs Act of 2017. Today, this is $40,000 with the One Big Beautiful Bill Act.<\/li>\n<li>The business pays a state-determined percentage of net income (e.g., 9.3% in California), which is deductible federally and credited against state income taxes.<\/li>\n<li>Benefits depend on your marginal tax rate, business income, and state-specific rules.<\/li>\n<li>PTET payments are reported on K-1s and flow through to your state return as credits or a reduction in taxable income.<\/li>\n<li>Not all states allow retroactive enrollment, and deadlines vary widely (e.g., California, New York, Oklahoma, Utah, Wisconsin).<\/li>\n<li>Some states impose underpayment penalties, roll forward excess payments, or have complex online enrollment systems.<\/li>\n<li>Timing of payments is important for maximizing current-year federal deductions, especially for cash-based businesses.<\/li>\n<\/ul>\n<\/div>\n<p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[vc_column_text css=&#8221;&#8221; woodmart_inline=&#8221;no&#8221; text_larger=&#8221;no&#8221; el_class=&#8221;post-content-block&#8221;]<\/p>\n<p class=\"\"><img decoding=\"async\" class=\"size-full wp-image-26059 alignright\" title=\"Pass-Through Entity Tax (PTET) Deduction\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/180145_1776899003_300_ptet-1.webp\" alt=\"Pass-Through Entity Tax (PTET) Deduction\" width=\"300\" height=\"200\" \/>As you consider your\u00a0<a title=\"Tax Planning Services\" href=\"https:\/\/wcginc.com\/tax-support\/tax-planning-services\/\">tax planning strategies<\/a> this year, please be aware that you might live in a state that has a pass-through entity tax (PTET) on the books for 2023. Why do you care? Well, it could provide you increased federal tax savings. Keep reading if you dare-<\/p>\n<p class=\"\">Way back in 2017, the Tax Cuts and Jobs Act was passed with a lot of cool tax deductions like the Section 199A qualified business income deduction. But life is one big equalizer, and Congress wanted to limit state and local taxes (SALT) to $10,000. This means either state income taxes or real estate taxes, or both, were severely muted. People in South Dakota owning a $600,000 house were like \u201cwhat\u2019s the big deal?!\u201d People living in Oregon (second highest state income tax rate next to California) owning the same house were like \u201cWTF, over?!\u201d<\/p>\n<p class=\"\">So! States got creative and created a state tax that was deducted on partnerships and S corporations (otherwise called pass-through entities\u2026 or PTE if you are a cool kid) resulting in lower federal taxable income. This tax, paid by the PTE, was then credited on the business owner\u2019s state income tax return. This also called the great SALT work-around.<\/p>\n<p class=\"\"><strong>Cash is cash<\/strong>\u00a0to a business owner whether it is spent by the business or the human.<\/p>\n<p class=\"0\">There are all kinds of rules, and not every business owner will benefit from the PTET deduction. As such, the tax planning for determining the efficacy of using this tax deduction is challenging.<\/p>\n<p>[\/vc_column_text]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-670fcdcec1bda\" class=\" wd-rs-670fcdcec1bda wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none for-border-heading \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"How_PTET_Works\"><\/span>How PTET Works<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>For those of you who are saying \u201cWoah\u201d this is news to me. Here are the nuts and bolts-<\/p>\n<ol>\n<li>The state has determined a percentage to be used. For example, in California it is 9.3%.<\/li>\n<li>This percentage is multiplied by the net ordinary income (profit) of the business. So, quick math\u2026 $100,000 in profit means $9,300 PTET payment to California (as an example) made by the business.<\/li>\n<li>This $9,300 is a federal tax deduction on your business (but it is also added back to the state). As such, you might have a $90,700 taxable profit to the IRS but $100,000 to California.<\/li>\n<li>Figure how much of your state income tax bill is not deductible on your Schedule A of your 1040. Compare that to the $9,300 (again, our current example). Multiply that by your marginal tax rate. Let\u2019s say all of the $9,300 is benefiting you, and you are in the 32% marginal tax bracket\u2026\u00a0<strong>you just saved $2,383 in taxes (cash)<\/strong>. Yay! There is a also small reduction in the qualified business income deduction (so\u2026 the math is 9,300 x 0.80 x 0.32).<\/li>\n<li>Wait! There\u2019s more. This $9,300 is also detailed on your K-1 from the business, and it flows through to your state tax return, and it is credited (like an estimated tax payment) against your state income tax.<\/li>\n<\/ol>\n<p>Bottomline is this- does it feel better to pay your state income tax with personal dollars or business dollars? It\u2019s a bit rhetorical\u2026 no need to say it out loud or call us. Additionally, the IRS has released\u00a0<a href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/n-20-75.pdf\" target=\"_blank\" rel=\"noopener\">Notice 2020-75<\/a>\u00a0which summarizes the behind the scenes tax deduction if you can\u2019t get enough.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-670fcdf0374d9\" class=\" wd-rs-670fcdf0374d9 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none for-border-heading \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Not_All_That_Glitters\"><\/span>Not All That Glitters<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>As Led Zeppelin once sang, Not all that glitters is gold. The pass-through entity tax deduction is one of those things. Here is a quickie list of problem states-<\/p>\n<ul>\n<li>California- you must have made at least a $1,000 payment by June 15 of the previous year to enroll. So, if you are working on 2023 tax returns in 2024, you needed to have made at least a $1,000 payment last year. So\u2026 no retro.<\/li>\n<li>Colorado- these clowns have screwed up PTET to the point where only a narrow body of business owners benefit. It depends on your income and if you are deemed a specified service trade or business.<\/li>\n<li>Michigan- irrevocable for 3 years like the roach motel.<\/li>\n<li>New York- must enroll in the current year using some online system completely separate from your tax returns.<\/li>\n<li>Oklahoma- must enroll by March 15 of the tax year. So, must enroll by March 15, 2024 for 2024 tax returns.<\/li>\n<li>Utah- must enroll by end of the year. So, not as bad as Oklahoma but a bit friendlier than California.<\/li>\n<li>Wisconsin- my home state is terrible. They deduct the business income away from your overall Wisconsin income. So, if you have low salaries (which is your goal in an S Corp), the savings disappear or even in some cases becomes a higher tax bill. In other words, you need non-business income to be higher (ie, salaries, other household income) so it makes sense. Wisconsin is definitely a \u201cusually not\u201d state.<\/li>\n<\/ul>\n<p>There are other states with issues, and as you can see some of this stuff is tricky.<\/p>\n<p>Other general pitfalls are-<\/p>\n<ol>\n<li>Some states charge massive underpayment penalties if payments are not paid on time.<\/li>\n<li>Some states will not refund excess payments, but rather roll them forward to future years.<\/li>\n<li>Some states have a clunky online enrollment \/ election system that is separate from what we can do on a tax return.<\/li>\n<li>Most estimated tax payment schedules include a payment in the next year. For example, PTET payments for 2024 will have a 2025 payment for Q4 or the second half of the year.\u00a0<strong>Make all payments in 2024 to maximize your PTET deduction<\/strong>\u00a0in the current year if your business uses cash-based accounting.<\/li>\n<\/ol>\n<p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[vc_row_inner equal_height=&#8221;yes&#8221; el_class=&#8221;boxes&#8211;pack&#8221; woodmart_css_id=&#8221;672d69041513d&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzJkNjkwNDE1MTNkIiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-684bd9288fc7a\" class=\" wd-rs-684bd9288fc7a wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none srvc-txt-block \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"300\" height=\"300\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Planning-Strategies.jpg\" class=\"attachment-full size-full\" alt=\"Tax-Planning-Strategies\" srcset=\"https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Planning-Strategies.jpg 300w, https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Planning-Strategies-150x150.jpg 150w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h3 class=\"info-box-title title wd-font-weight-600 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Tax_Planning_Services\"><\/span>Tax Planning Services<span class=\"ez-toc-section-end\"><\/span><\/h3>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Read about our essential tax planning services and how they can help you reduce your taxes!<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"\/tax-support\/tax-planning-services\/\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-684bda535bd53\" class=\" wd-rs-684bda535bd53 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none srvc-txt-block \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"300\" height=\"185\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/298261_2149828895_tax_reduction_strategies_300.jpg\" class=\"attachment-full size-full\" alt=\"Tax Reduction Strategies\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h3 class=\"info-box-title title wd-font-weight-600 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Tax_Reduction_Strategies\"><\/span>Tax Reduction Strategies<span class=\"ez-toc-section-end\"><\/span><\/h3>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Discover practical strategies for tax reduction\/avoidance to maximize your financial savings.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"\/tax-support\/reducing-taxes\/\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-684bda8e7d5d3\" class=\" wd-rs-684bda8e7d5d3 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none srvc-txt-block \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"622\" height=\"622\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Center.jpg\" class=\"attachment-full size-full\" alt=\"Tax-Center\" srcset=\"https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Center.jpg 622w, https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Center-300x300.jpg 300w, https:\/\/wcginc.com\/wp-content\/uploads\/Tax-Center-150x150.jpg 150w\" sizes=\"(max-width: 622px) 100vw, 622px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h3 class=\"info-box-title title wd-font-weight-600 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Tax_Center\"><\/span>Tax Center<span class=\"ez-toc-section-end\"><\/span><\/h3>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Access comprehensive tax services, including refunds, audits, and consultations, all in one place!<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"#\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][\/vc_row_inner]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68b56af8b6a0e\" class=\" wd-rs-68b56af8b6a0e wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title faqs-wrap \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title box-title-style-default wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_is_a_pass-through_entity_tax_PTET\"><\/span>What is a pass-through entity tax (PTET)?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>A state tax on partnerships and S corporations that can reduce federal taxable income.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Why_does_PTET_exist\"><\/span>Why does PTET exist?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>To work around the $10,000 SALT deduction cap from the 2017 Tax Cuts and Jobs Act.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_does_PTET_save_money_for_business_owners\"><\/span>How does PTET save money for business owners?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Payments made by the business are deductible federally and credited on your state tax return.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Do_all_states_allow_PTET\"><\/span>Do all states allow PTET?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>No, rules, deadlines, and benefits vary widely by state.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Can_I_enroll_retroactively_for_PTET\"><\/span>Can I enroll retroactively for PTET?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In many states, retroactive enrollment is not allowed (e.g., California).<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Are_there_penalties_for_missing_PTET_payments\"><\/span>Are there penalties for missing PTET payments?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Yes, some states charge significant underpayment penalties.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_does_PTET_affect_my_K-1_and_state_taxes\"><\/span>How does PTET affect my K-1 and state taxes?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>PTET is reported on the K-1 and credited against your state income tax liability.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"When_should_PTET_payments_be_made\"><\/span>When should PTET payments be made?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Ideally within the tax year to maximize federal deduction; timing varies by state.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Does_PTET_always_reduce_my_taxes\"><\/span>Does PTET always reduce my taxes?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Not necessarily; benefits depend on income, state rules, and other tax considerations.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Where_can_I_find_state-specific_PTET_rules\"><\/span>Where can I find state-specific PTET rules?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Each state\u2019s revenue department or a qualified tax professional can provide guidance.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_column_text css=&#8221;&#8221; woodmart_inline=&#8221;no&#8221; text_larger=&#8221;no&#8221; el_class=&#8221;post-content-block&#8221;] As you consider your\u00a0tax planning strategies this year, please be aware that you might live<\/p>\n","protected":false},"author":6,"featured_media":44331,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[17],"tags":[18,230,233],"class_list":["post-1403","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-tax-planning","tag-s-corps","tag-general-business"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.8 (Yoast SEO v27.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What is Pass-Through Entity Tax (PTET) Deduction &amp; How Does It Work?<\/title>\n<meta name=\"description\" content=\"As you consider tax planning, please be aware that you might live in a state that has a pass-through entity tax (PTET), and you should be leveraging it.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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