PTE / SALT Workaround
The pass-through entity tax election may restore a state-tax deduction lost to the SALT cap for owners of pass-through entities. Availability and mechanics depend on your state.
At a glance
- Category
- Business Owner
- May be relevant for
- Pass-through owners in high-tax states
- Our approach
- Document review → proposal → implementation
- Service area
- Nationwide (office in Westlake Village, CA)
Whether this applies to you depends on your specific facts and circumstances.
Ask a CPA about your situationImportant: This page is for educational purposes only. It describes how this strategy may work under current law. Whether it is appropriate for you, and how to implement it correctly, depends entirely on your specific facts, timing, and documentation. This is not individualized tax advice. Speak with a licensed CPA before acting.
How it may work
PTE / SALT Workaround — a plain-English overview
The sections below describe how this strategy works under current tax law, what conditions may make it applicable, and what factors affect the outcome.
The problem this addresses
The Tax Cuts and Jobs Act (2017) capped the state and local tax (SALT) deduction at $10,000 for individuals. High-income residents of states like California, New York, and New Jersey — where state income tax on a profitable business can exceed that cap many times over — effectively lost a large deduction. The $10,000 cap has been extended, but its long-term fate remains subject to Congressional action.
How the PTE election works
Most states with a high individual income tax have now enacted elective pass-through entity tax regimes. When an eligible pass-through entity (S-corp, partnership, LLC taxed as a partnership) makes the election, the entity pays state income tax directly at the entity level. That payment is deductible as a business expense on the federal return — not subject to the SALT cap, because the cap applies to taxes paid by individuals, not by entities. Partners and shareholders receive a state tax credit against their individual state tax liability for the taxes paid by the entity, so there is no double taxation.
California's approach and its mechanics
California's elective PTE tax (AB 150) allows qualifying entities to pay a 9.3% tax on qualified net income at the entity level. Partners and shareholders claim a credit against their California income tax. The credit can be carried forward if it exceeds the current-year liability. The election must be made by the original filing deadline — late elections are not available. Quarterly estimated payments are required to avoid underpayment penalties at the entity level. Given California's high state income tax rates and the size of profits for many of our clients, this election can be material.
This does not work in all states or all structures
Not every state has enacted a PTE election. The mechanics, credit calculations, and filing requirements vary significantly by state. Some elections cannot be made retroactively. Some multi-state operators face complexity around apportionment. The analysis requires knowing your specific state(s) and entity type.
Document-first
What we'd review before recommending this strategy
We do not guess. We review the documents, propose, and implement. Here is what we'd want to see to evaluate whether this strategy may apply to you.
- State(s) of formation and operation — which PTE regimes are available
- Entity type — S-corps, partnerships, and LLCs taxed as partnerships are eligible in California; C-corps are not
- Qualified net income calculation under the applicable state's rules
- Credit utilization — whether shareholders can use the full credit in the current year or must carry forward
- Estimated payment timing — to ensure the entity-level payments are made before deadlines
- Federal deductibility confirmation — the IRS has provided guidance (Notice 2020-75) confirming the deduction
Who this may fit
Profiles where this strategy comes up most
These are the client situations where we most commonly evaluate this strategy. Whether it applies to you depends on your specific facts.
Common Questions
Questions about PTE / SALT Workaround
Educational answers to questions we often hear when discussing this strategy with clients.
What if we miss the California PTE election deadline?
California's PTE election must be made on or before the original return due date. Late elections are not permitted. We flag this deadline as part of the quarterly advisory calendar.
Is the federal deduction secure?
The IRS confirmed in Notice 2020-75 that SALT payments made by pass-through entities are deductible at the entity level and are not subject to the individual SALT cap. That guidance has been consistent since, though any change to federal tax law could alter the picture.
Does the credit always eliminate the double-tax?
In most cases, yes — the state credits are designed to offset the individual tax that would otherwise be due. However, credit limitations, carryforward rules, and multi-state complications can create situations where some double taxation occurs. We model this for each client.
Educational content only
This page describes PTE / SALT Workaround for general educational purposes under current tax law. It is not individualized tax, legal, or investment advice. Whether this strategy is appropriate for you — and how it should be structured, documented, and reported — depends entirely on your specific facts, timing, and circumstances. Tax law changes frequently. Always consult a licensed CPA before acting on any information here.
We do not guess. We review the documents, propose, and implement.
Ask a CPA
Wondering if PTE / SALT Workaround applies to you?
Tell us about your situation and we'll follow up within one business day. We review the actual documents and give you a direct answer — no obligation.
- Document-first review — we start with your actual returns and records
- Clear explanation of what may apply and why
- No obligation — honest if there isn't enough value to act on
Explore more
Other Business Owner strategies
S-Corp Election
Profitable business owners
Electing S-corporation status may reduce self-employment tax for owners with consistent profit, when paired with a reasonable salary. Whether it helps depends on profit level, payroll cost, and state treatment.
Reasonable Compensation
S-corp owners
S-corp owners must pay themselves reasonable wages. Setting compensation defensibly is where S-corp planning is won or lost — too low invites scrutiny, too high gives back the benefit.
Accountable Plan
Owners with home-office and mixed-use expenses
An accountable plan can let a business reimburse owners and employees for legitimate business expenses — home office, mileage, and more — in a documented, compliant way.
Ready to find out what applies to your situation?
A discovery call is how we start. We review the documents and tell you honestly what may be worth pursuing.