💼 Pass-Through Entity Tax Strategy

Should You Elect PTET for 2025 and Beyond?

A Fullerton-focused analysis of how PTE owners may benefit—or lose—under the new SALT limits established by the OBBBA.

PTET · SALT · OBBBA

Do you own a business organized as a pass-through entity (PTE)—such as a partnership, a limited partnership, an S corporation, or a multimember LLC taxed as a partnership or an S corporation? If so, you face an important tax decision.

For the past several years, many PTE owners have elected to have their businesses pay the state income tax on their business income rather than paying it personally. This approach allows the PTE to deduct those state income tax payments as a federal business expense.

Why Choose This Option?

The Tax Cuts and Jobs Act of 2018 capped the personal itemized deduction for state and local taxes (SALT) at $10,000. This cap does not apply to income taxes paid by business entities.

As a result, almost all states with income taxes allow PTE owners to elect pass-through entity taxes (PTETs) instead of paying state income tax individually. The IRS has approved this practice, and many PTE owners use it to fully deduct state taxes for federal purposes despite the SALT limitation.

Recent legislation—the One Big Beautiful Bill Act (OBBBA)—did not eliminate or restrict PTETs, which remain optional. However, it did raise the SALT deduction limit to $40,000 for tax years 2025 through 2029. This raises an important question: Should PTE owners skip the PTET election and simply deduct their state income taxes on their personal returns?

Not necessarily. PTETs can still offer meaningful benefits, including:

• Overcoming the reduced benefit for high-income taxpayers. The new $40,000 SALT cap phases down once modified adjusted gross income (MAGI) exceeds $500,000. Taxpayers with income above $600,000 receive only a $10,000 deduction.

• Lower federal and self-employment taxes. When your PTE pays state taxes and deducts them as a business expense, it reduces the income passed through to you. This lowers both your federal income tax and your self-employment taxes—12.4 percent Social Security (up to the annual wage base, $176,100 for 2025) and 2.9 percent to 3.8 percent Medicare tax on net self-employment earnings.

• Lower adjusted gross income (AGI) and related advantages. A PTET election lowers your AGI, which may help you (1) avoid the net investment income tax and Medicare surcharge thresholds, (2) qualify for deductions with AGI floors (such as medical expenses and charitable contributions), and (3) preserve deductions and credits that phase out at higher AGIs, including IRA contributions and real-estate loss deductions.

Potential Savings When Using the Enhanced Standard Deduction

Some taxpayers will owe less tax by electing PTET and taking the permanently enhanced standard deduction under the OBBBA instead of itemizing.

Potential Downside

Electing PTET can reduce your 20 percent qualified business income (QBI) deduction because it lowers the taxable income you receive from the PTE.

Bottom Line

Every PTE owner’s situation is unique. You should run the numbers to determine whether a PTET election benefits you.

Need help deciding whether PTET makes sense?
Tandy Consulting Inc. helps PTE owners in Fullerton and across Orange County run the numbers and determine the best tax position.
📅 Book a PTE tax strategy review

Who Should Consider PTET?

• Partnership owners

• Multimember LLCs taxed as partnerships

• S corporation shareholders

• PTE owners above the SALT phaseout thresholds

PTET is especially valuable for high-income owners in Fullerton and North Orange County.

Advantages at a Glance

• State taxes become fully deductible

• Lower AGI and fewer phaseouts

• Lower SE tax for many partners

• Potential annual savings per owner

When PTET May Not Work

• Low state tax liability

• Taxpayers who benefit fully from the $40k SALT cap

• Taxpayers relying heavily on the QBI deduction