Pass-Through Entity (PTE) Tax Elections: The SALT-Cap Workaround

Since 2018, an individual's federal deduction for state and local taxes (SALT) has been capped — a real cost for business owners in high-tax states. Most income-tax states answered with a workaround: an elective Pass-Through Entity tax. The business itself elects to pay the state income tax at the entity level, the entity deducts it as an ordinary business expense (the IRS blessed this structure in Notice 2020-75), and the benefit flows to the owners around the individual cap.

WHO IT FITS: S-corporations, partnerships, and in some states LLCs, whose owners live in — or whose business earns income in — a state that offers the election. Most states with an income tax now offer one, but every state's mechanics differ: who must consent, whether the owners get a credit or an exclusion for the entity-paid tax, and how nonresident owners are treated.

THE FLORIDA FRAME — read this first: Florida has NO individual income tax, so a purely Florida owner gains nothing from a PTE election and Florida offers none to make. This playbook matters when you, your owners, or your business earn income in states that do tax income — and the election is judged state by state, not federally.

Common mistakes: missing the election deadline (in many states the election, or the first estimated payment, is due during the tax year — before anyone is thinking about the return); assuming the election is automatic or permanent (it is usually annual, and irrevocable for that year once made); and ignoring how the owner's home state credits taxes paid elsewhere.