Is the PTET Election Still Worth It Now That the SALT Cap Is $40,400?
The SALT cap jumped from $10,000 to $40,400 for 2026, and plenty of business owners took that as a sign they could stop thinking about state taxes on their federal return. For a lot of high earners, that conclusion doesn't hold up. The bigger cap shrinks by 30 cents for every dollar of modified adjusted gross income (MAGI) above 505,000,andby~606,333 of MAGI it's right back to the same $10,000 cap high earners have lived with since 2018.
The pass-through entity tax (PTET) election lets a partnership or S corporation pay state income tax at the business level, where it's deducted as a business expense and never touches the individual SALT cap. Roughly three dozen states offer some version of it, and the One Big Beautiful Bill Act left it fully intact, including for law firms, medical practices, and other service businesses that an earlier House draft would have shut out.
Below, we cover who still benefits from the election, who might not, what changed for 2026, and why December 31 is a real deadline here even though the election itself usually isn't.
Who Still Benefits Most From a PTET Election in 2026?
Owners with MAGI above ~$606,333 benefit the most, because for them the higher SALT cap effectively doesn't exist. Their personal SALT deduction is capped at $10,000, and property taxes alone often fill that. State income tax beyond that generally produces no federal deduction unless it's paid through the entity.
Consider a hypothetical law firm partner named Priya. Her share of firm income in 2026 is $900,000, she files jointly, and she lives in a state with a flat 6% income tax (simplified to keep the math clean). Her state income tax on that share is $54,000. At her income, her SALT cap is $10,000, and her property taxes already exceed it. Without a PTET election, that $54,000 buys her nothing on her federal return.
If the firm elects PTET and pays the $54,000 at the entity level, her taxable share of firm income drops to $846,000. Since her income sits well inside the 37% bracket (which starts at $768,700 for joint filers in 2026), that works out to $19,980 less federal income tax in this simplified example, assuming her state gives her a full credit for the tax the firm paid. As a law partner at this income level she isn't eligible for the QBI deduction anyway, so there's no offset to account for.
Does the Higher SALT Cap Make PTET Pointless for Everyone Else?
No, and the reason is the standard deduction. The $40,400 cap only matters if you itemize, and the 2026 standard deduction for joint filers is $32,200. Plenty of owners in the $250,000 to $500,000 range land on the standard deduction, which means their state income taxes produce no federal benefit at all, cap or no cap.
Take a hypothetical owner named Marcus. His S corporation builds custom cabinetry, he pays himself a $150,000 salary, the business passes through another 230,000ofprofit,hefilesjointly,andhisstatehasaflat5%incometax.Between~19,000 of state income tax and $6,000 of property tax, he'd be allowed to deduct the full $25,000 under the new cap. Add $4,000 of mortgage interest, though, and his itemized total is $29,000, which is less than the standard deduction. So he takes the $32,200 and his state taxes do nothing for him.
With a PTET election, the S corporation pays $11,500 of state tax on the $230,000 of profit and deducts it, and Marcus still takes the full standard deduction. That deduction also trims his QBI deduction a bit (ie. 20% of the 11,500),sointhissimplifiedexamplethenetfederalsavingscometo~2,200. Smaller than Priya's result, but real money for an election and a timely payment.
There's a third group worth mentioning: owners sitting just above $505,000 of MAGI. Because the PTET deduction lowers federal AGI, it can pull MAGI back under the phase-down threshold and restore some of the larger cap for property taxes and any state tax still paid personally.
What Changed for PTET Under the New Tax Law?
Three things matter for 2026 planning.
First, the workaround survived. IRS Notice 2020-75 still governs, and the final bill dropped the proposal that would have blocked service businesses (law, health care, accounting, consulting) from using it.
Second, a new limit on itemized deductions took effect this year. For anyone in the 37% bracket, itemized deductions are now reduced by 2/37 of the lesser of total itemized deductions or income above the start of that bracket, which effectively caps their value at 35 cents on the dollar. A PTET payment is a business deduction, so it reduces income before itemized deductions come into play and generally isn't subject to that haircut.
Third, some state programs were written to expire along with the original SALT cap at the end of 2025. Others were extended. California, for example, extended its program through the 2030 tax year and softened the penalty for missing its June 15 prepayment. If you elected in a prior year, it's worth confirming your state's program is still active for 2026.
When Can a PTET Election Cost You Money?
PTET isn't automatic upside, and a few situations can shrink or reverse the benefit.
The QBI tradeoff is the most common. For owners of non-service businesses below the income limits, the PTET deduction reduces qualified business income, which reduces the 20% QBI deduction. In Marcus's case the tradeoff was small. With a larger payment and a lower tax bracket, it can eat a bigger share of the savings.
Multistate situations take more care. If you live in one state and your business pays PTET to another, your home state may or may not give you credit for that payment. Owners in states with no broad income tax, such as Tennessee, Texas, or Florida, have nothing to elect at home, but a business that earns income in a taxing state may still be able to use that state's PTET for its nonresident owners.
The mechanics also matter. Many states require consent from all owners or apply the election to every eligible owner, and the business has to fund the tax payments, which can strain cash flow in a lumpy year.
What Should Business Owners Do Before December 31?
The most time-sensitive step is making sure the PTET payment actually lands by December 31. For a cash-basis entity, the federal deduction generally follows the year the tax is paid, so a payment made in January moves the deduction into next year even if the state counts it toward this year's credit.
Election deadlines vary widely. Many states let the entity elect on its return the following spring, but New York required its 2026 election by mid-March of this year, so a New York entity that missed it can't add it now. In states where the window is still open, Q4 is the right time to decide, because you finally have a solid read on the year's income.
At Lotus, PTET is one of the items we model during fall tax planning for business owners, working alongside the client's CPA. The calculation that matters isn't complicated, but it needs real numbers: projected MAGI, whether you'll itemize, your QBI position, and how your state's credit works.
The Bottom Line
The higher SALT cap changed who benefits from PTET, but it didn't make the election obsolete. Owners above ~$606,333 of MAGI are in the same position they were in last year, and the new 2/37 rule gives the entity-level deduction a slight edge over itemizing for those in the top bracket. Owners who take the standard deduction may benefit even though the cap looks generous on paper. And the QBI tradeoff and multistate rules mean the answer is different for every business.
If you own a pass-through business or are a partner in one, it's worth a conversation with your advisor and CPA before year-end, while there's still time to make the payment count for 2026. As always, reach out if you'd like us to run the numbers for your situation.
Frequently Asked Questions
Q: Does the $40,400 SALT cap mean I don't need a PTET election anymore? A: Not necessarily. The $40,400 cap phases down for MAGI above $505,000 and returns to 10,000at~606,333, so high earners are largely in the same position as before. Owners who take the $32,200 standard deduction (joint filers, 2026) also get no federal benefit from personal state income tax, but a PTET payment is deducted at the business level whether or not they itemize.
Q: Can I use a PTET election if I live in a state with no income tax? A: Your home state has no income tax to elect into, but a business that earns income in a state with a PTET program may be able to elect there for nonresident owners. Whether that helps depends on how much income is taxed in that state and the federal bracket you're in.
Q: When does the PTET payment have to be made to get a federal deduction this year? A: For a cash-basis partnership or S corporation, the federal deduction generally applies in the year the tax is actually paid. To deduct it on your 2026 federal return, the payment usually needs to be made by December 31, 2026, even if the state's return isn't due until 2027.
This post is for educational purposes only and does not constitute investment, tax, or legal advice. Please consult a qualified financial advisor, CPA, or attorney before making any financial decisions.
