What is Pass-Through Entity Tax (PTET)?
Definition A pass-through entity tax is an elective state tax that a partnership or S corporation pays at the entity level, allowing the business to deduct those state taxes federally on behalf of its owners. It was created by many states as a workaround to the federal cap on the individual state and local tax deduction. Owners typically receive a corresponding state credit or income adjustment for the tax paid.
For owners in high-tax states, electing PTET can restore a federal deduction the SALT cap would otherwise limit, making it a widely used planning move.