Living in CA or NY? Stop Losing Money. The 'PTET' Election Hack to Bypass the $10k SALT Cap

🤬 The Zombie Tax Rule That Won't Die

If you live in a high-tax state like California, New York, or New Jersey, you know the pain. You pay $50,000 or $100,000 in state income taxes.

Many hoped the $10,000 SALT Cap would expire with the TCJA sunset in 2025. But here we are in 2026, and the limit effectively remains a burden for high earners. You are still being double-taxed on everything above $10,000.

But the legal backdoor is still wide open. It is called the Pass-Through Entity Tax (PTET) Election. It remains the single biggest tax loophole for business owners in 2026.

Almost every state with an income tax has enacted a PTET law to help its residents fight back against the IRS limit.

The Concept is Simple: Instead of YOU paying the state tax personally (which is capped at $10k), your COMPANY pays the tax.
👉 Business expenses are uncapped.
👉 Therefore, the tax becomes 100% deductible. 

Living in CA or NY? Stop Losing Money.

How You Save $14,000 Instantly

Let's look at a real-world example of a business owner in California earning $500,000 net income.

Scenario A: Without PTET (The Old Way)	Scenario B: With PTET (The Smart Way)
You pay $45,000 in CA State Tax personally.	Your S-Corp/LLC pays the $45,000 CA State Tax.
IRS Federal Deduction: Capped at $10,000.	IRS Federal Deduction: Full $45,000. (It's a business expense!)
Taxable Federal Income: $490,000.	Taxable Federal Income: $455,000.
Result: You pay full tax.	Result: You saved ~$13,000 in Federal Tax (37% of the difference).

Who Can Use This Strategy?

This is not for W-2 employees. You must own a "Pass-Through Entity."

• ✅ Eligible Entities
  • S-Corps
  • Partnerships (LLCs taxed as Partnerships)
  • LLCs (Multi-member)
• ❌ NOT Eligible
  • Sole Proprietors (Schedule C) - Unless you form an LLC and elect S-Corp status!
  • C-Corps (They already pay entity tax).

The "Election" Deadline Trap

You cannot just decide to do this when filing your taxes in April. You must make the "Election" in advance.

📅 Critical Dates (Example: California)

June 15th: You must make a prepayment of the tax (usually 50% of prior year tax or $1,000). If you miss this payment, you are disqualified for the whole year.

March 15th (Year Prior): Some states require the election form to be filed by March 15th of the tax year. Check your state's specific deadline immediately.

Does This Trigger an Audit?

No. The IRS issued Notice 2020-75 giving this strategy their blessing. They explicitly stated that state taxes paid by a partnership or S-Corp are deductible. It is one of the few times the IRS has publicly "approved" a workaround.

🛡️ Chief Editor's Verdict

If you are paying more than $10,000 in state tax and owning a business, not using PTET is like burning money.

1. Call Your CPA Today: Ask: "Did we make the PTET election for 2026? If not, can we still make a late payment?"
2. Sole Proprietors: If you are making over $150k, consider forming an S-Corp just to unlock this deduction. The tax savings often outweigh the administrative costs.
3. Check State Restrictions: In California, be wary of the "Tentative Minimum Tax (TMT)" limitation, which might reduce your credit. Always run a projection first.

Don't let the SALT Cap limit your wealth.

Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Tax laws, including the status of the SALT cap and PTET rules, are subject to change by Congress and state legislatures (e.g., California AB 150). PTET elections are irrevocable for the tax year. Always consult with a qualified CPA or tax attorney to analyze your specific situation before making any elections.