For years, small business owners and self-employed professionals have relied on the Pass-Through Entity Tax (PTET) to save thousands in federal taxes. PTET allows S corporations, partnerships, and multi-member LLCs to pay state income taxes at the entity level instead of through individual returns. This strategy became popular after the 2017 Tax Cuts and Jobs Act (TCJA) capped the State and Local Tax (SALT) deduction at $10,000. But the new One Big Beautiful Bill Act (OBBBA), effective in 2025, temporarily raises that cap to $40,000. Many business owners now wonder whether PTET still makes sense. The answer depends on your income, filing status, and where your business operates.
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What Is the Pass-Through Entity Tax (PTET)?
The PTET is a state-level election that lets certain business entities pay income taxes directly at the business level. By doing so, owners receive a full federal deduction for state income taxes paid—without the $10,000 SALT cap limitation. This election is available to S corporations, partnerships, and LLCs taxed as such. For example, if a Virginia S corporation earns $400,000 and owes $23,000 in state tax, paying through PTET allows the business to deduct the full $23,000. This lowers the owner’s federal taxable income and can save thousands each year. More than 30 states, including Virginia, Maryland, and California, now offer PTET elections.
How the OBBBA Changes the SALT Deduction
Before the OBBBA, taxpayers could only deduct up to $10,000 in state and local taxes on their federal return. Starting in 2025, the new law increases this cap to $40,000 through 2029, indexed for inflation. However, the benefit starts to phase out for taxpayers with Modified Adjusted Gross Income (MAGI) above $500,000 and disappears entirely at $600,000. After 2029, the cap reverts to $10,000 unless Congress extends the increase. For business owners in high-tax states or those earning above the phaseout limit, the PTET still offers full deductibility for state taxes, making it a critical tax planning tool.
Why PTET Still Matters Under OBBBA
Even with the higher SALT deduction, PTET continues to provide major tax advantages. First, PTET payments are fully deductible at the entity level, not limited by the SALT cap or income thresholds. This creates an “above-the-line” federal deduction that directly reduces taxable business income. Second, PTET reduces Adjusted Gross Income (AGI), helping business owners qualify for other valuable deductions like the Qualified Business Income (QBI) deduction and retirement contribution eligibility. It can also lower self-employment (SE) tax for partnerships by reducing taxable net income. Third, PTET helps those who take the standard deduction instead of itemizing. Because the deduction happens at the business level, owners can still use the full standard deduction on their personal returns. Finally, PTET lowers income subject to Alternative Minimum Tax (AMT)—something itemized deductions cannot do. For example, a Fairfax-based consulting firm paying $25,000 in PTET could reduce both its federal income tax and AMT exposure significantly.
When PTET May Not Be the Best Option
PTET doesn’t always work for everyone. If your total state and local taxes fall below the new $40,000 SALT limit, and you already itemize deductions, PTET may offer only a small benefit. It could even reduce your QBI deduction slightly since PTET payments lower the business income used in that calculation. Additionally, PTET can complicate taxes for businesses earning income in multiple states. Some states, such as North Carolina and Georgia, use a subtraction-from-income method rather than providing a tax credit. If your home state doesn’t recognize those payments, you might face double taxation. PTET elections also require careful timing, as missed payment deadlines can invalidate the election. For businesses with several owners, one partner’s decision affects everyone since most states make PTET elections binding for all members. Always consult your CPA before making the election to ensure it’s worth it for your situation.
PTET After the Big Beautiful Bill: Choosing Smart
After OBBBA, the choice to elect PTET should be based on a detailed analysis of your income and filing status. For taxpayers with MAGI below $500,000, the $40,000 SALT cap may already cover most state and local taxes. However, PTET can still help reduce AGI and self-employment taxes. For high earners above $600,000, PTET becomes a must. Since the expanded SALT deduction disappears at that level, PTET is the only way to fully deduct state income taxes. It also benefits self-employed professionals who rent rather than own homes, as they likely take the standard deduction. In these cases, PTET gives them the state tax benefit they’d otherwise lose. The best approach is to model both scenarios—with and without PTET—to see which yields the greatest savings. Many Virginia business owners find that combining PTET with the $40,000 SALT cap for property taxes produces the best outcome.
Summary
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If your income is below $500,000 (joint) – You can enjoy the $40,000 SALT deduction, but PTET may still lower AGI and SE tax.
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If your income is above $600,000 (joint) – The $40,000 SALT cap no longer applies, so PTET becomes your main deduction tool.
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If you don’t own a home or itemize – PTET lets you deduct state taxes at the entity level while still taking the standard deduction.
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If you have high property taxes and income taxes – Combining PTET and the SALT deduction can produce the biggest total savings.
Why PTET Still Matters Under OBBBA
Even with a $40,000 SALT cap, PTET remains a strong planning tool for small business owners.
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High-Income Phaseouts Limit SALT Benefits – If your household income exceeds $500,000, the OBBBA’s higher SALT limit begins to fade. For these taxpayers, the PTET is often the only way to fully deduct state income taxes.
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Entity-Level Deduction Saves More – PTET payments are above-the-line business deductions that reduce your adjusted gross income (AGI). Lower AGI means better eligibility for other deductions and credits like the Qualified Business Income (QBI) deduction or Child Tax Credit.
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Standard Deduction Bonus – Many small business owners don’t itemize deductions. PTET moves state taxes off Schedule A, allowing them to take the full standard deduction plus the business-level tax deduction.
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Self-Employment Tax Reduction – Partnerships paying PTET reduce the income passed to partners, which can lower self-employment tax.
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Alternative Minimum Tax (AMT) Advantage – SALT itemized deductions are not deductible under AMT rules, but PTET deductions reduce both regular and AMT income.
Example: John runs a Virginia S Corp earning $300,000. The company owes $17,000 in state taxes. Paying this via PTET lets John deduct the full $17,000 federally, saving roughly $6,000 in federal income tax.
Advantages and Disadvantages of PTET
| Advantages | Disadvantages |
|---|---|
| Above-the-line federal deduction | Complexity in multi-state filings |
| Reduces AGI and SE tax | May reduce QBI deduction slightly |
| Helps high earners avoid SALT phaseout | Some states don’t offer credits for out-of-state PTET |
| Works with standard deduction | Requires timely election and payment |
| Reduces AMT income | Not available to sole proprietors |
Virginia’s PTET Program: A Local Advantage
Virginia introduced its Pass-Through Entity Tax in 2022, allowing qualifying S corporations and partnerships to pay a 5.75% tax at the entity level. Business owners then receive a refundable credit for their share of the tax paid. Elections must be made annually and paid electronically using the PTET-PMT form. Even out-of-state entities with Virginia-resident owners can qualify. Because Virginia’s PTET follows federal deductibility rules, these payments are fully deductible for federal purposes, helping reduce both federal income and AMT exposure. For small businesses in Fairfax, Herndon, and Alexandria, this election can lead to meaningful annual savings and better cash flow management.
Key Takeaways for Small Business Owners
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PTET remains valuable even after OBBBA, especially for high earners and those in high-tax states.
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The SALT deduction phases out above $500,000 of income, making PTET essential for maintaining full deductibility.
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PTET lowers AGI and SE tax, boosting eligibility for QBI deductions and other credits.
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Each state has unique rules, so filing deadlines and payment schedules matter.
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Combine PTET with the SALT cap strategically for maximum savings on both federal and state taxes.
Conclusion – Pass-Through Entity Tax (PTET)
The One Big Beautiful Bill Act may have raised the SALT deduction limit, but it didn’t eliminate the need for PTET. For many small business owners, PTET remains the most efficient way to reduce taxable income and protect against future federal changes. The new $40,000 cap is temporary, phased out for high earners, and set to revert to $10,000 in 2030. Meanwhile, PTET continues to offer unlimited deductions at the entity level—helping business owners retain more of what they earn. For Virginia business owners and self-employed professionals, working with an experienced tax advisor is the best way to evaluate PTET’s benefits and ensure you’re using every strategy available to minimize taxes and strengthen your financial future.
