An increasing number of states are embracing the creation of elective taxes on pass-through entities (PTEs) to help business owners pay state and local income taxes (SALT) at the entity level rather than through personal income tax returns. The workaround is becoming a popular way for states to avoid the negative repercussions of the $10,000 limit on individuals’ deductions for state and local taxes, which was part of the tax reform law commonly known as the Tax Cut and Job Act's (TCJA).

The limit, also known as the "SALT cap," is in effect for 2018 through 2025, and it primarily affects individuals who itemize deductions on their federal income tax returns. Lawmakers from several states are clamoring for a repeal of the SALT cap, but President Joe Biden has yet to address the issue directly. With a repeal being uncertain, many states are passing legislation to adopt elective taxation on PTEs, and in acknowledgment, the IRS confirmed the method's viability last year.

The States’ Response at a Glance

So far, 20 states have enacted an entity level election or requirement, which allows PTEs — such as S corporations, partnerships and most LLCs — to be taxed at the entity level. This, in turn, allows the entity to deduct the state and local tax payments, which are then allocated to the individual owners, thereby bypassing the individual SALT cap. Presently, the states with PTE workarounds are: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oklahoma, Oregon, Rhode Island, South Carolina, and Wisconsin. Connecticut is the only state that requires a PTE tax; the rest are elective.

The challenge with the SALT cap workarounds is that each state takes a slightly different approach, which makes the evaluation of the workarounds challenging for businesses with a multistate presence. To illustrate the different potential approaches – and the different effective dates for these approaches – we've highlighted five states’ PTE tax laws below:


On July 16, 2021, Gov. Gavin Newsom signed the PTE tax into law. PTEs taxed as qualifying partnerships and S corporations may elect to pay tax on income that would otherwise be subject to personal income tax when distributed to qualifying owners. The elective PTE tax would apply to tax years starting on or after Jan. 1, 2021, and end when the federal limit is set to expire after 2025.


Applicable to tax years starting on or after Jan. 1, 2018, Connecticut was first to enact a PTE-level tax in May 2018. The PTE tax applies to S corporations, partnerships, and LLCs treated as partnerships for federal income tax purposes. Connecticut law requires a PTE to pay tax on its income at the entity level and provides that owners are permitted a credit of 87.5% of the taxes paid at the entity level.


On July 16, 2021, Gov. Charlie Baker signed the PTE tax into law. Effective for tax years starting on or after Jan. 1, 2021, eligible PTEs, including S corporations, partnerships, and certain LLCs, may elect to pay tax on their "qualified income taxable in Massachusetts" at a rate of 5%. Individual owners of these electing PTEs may claim a tax credit equal to 100% of their distributive share of tax paid at the entity level. This tax will only be effective while the federal SALT cap is in effect.

New Jersey

Effective for tax years starting on or after Jan. 1, 2020, New Jersey allows a PTE to elect to be taxed at the entity level. A PTE with at least one member liable for New Jersey gross income tax may elect to be liable for and pay the Business Alternative Income Tax (BAIT) in a tax year. The PTE election is available to partnerships, New Jersey S corporations, and LLCs, but not single member LLCs or sole proprietorships.

New York

On Apr. 19, 2021, then-Governor Andrew Cuomo signed the PTE tax into law, effective for tax years starting on or after Jan. 1, 2021. It applies to eligible partnerships (excluding publicly traded partnerships), LLCs, and S corporations. The distributive share of income to C corporations or other PTEs is excluded from the PTE tax base.

Should I Pursue a PTE Election?

When it comes to a PTE, there is no one-size-fits-all scenario. If your state offers elective taxation at the PTE level, you need to evaluate whether it will be helpful for you or harmful. One major issue to consider is that some states do not yet offer elective taxation at the PTE level, and these states may not provide a credit for taxes paid to another state at the PTE entity level. In general, state taxes paid to an individual’s state of residence are permitted to be offset by credits for any state taxes paid by the individual to other states where the individual is not a resident. But this credit mechanism may be disrupted by the new PTE election because certain states may not recognize elective taxes paid at the PTE level as being creditable at the individual level. For example, let's say you do business in State B, which has adopted elective taxes on a PTE, but you reside in State A, which has not. If you make the PTE election in State B, you might find out that since State A has not yet adopted an elective PTE tax, you will not get credit for taxes paid at the entity level in State B. You could lose a dollar-for-dollar credit and replace it with a deduction, costing you money.

Another challenge is that many PTEs will include individual partners who reside in different states. For instance, one partner may live in Texas, while another resides in California. During your evaluation, it is important to note that you often cannot pick or choose which individual’s taxes are paid through the PTE when you make a PTE election. Instead, the process generally includes all individuals. Therefore, you could have a situation where a PTE election is beneficial for the Texas resident, but not the California one. Depending on the makeup of the individual owners and the states in which they reside, a PTE election could be advantageous or detrimental.

Next Steps

The dynamics of varying owners in a PTE, paired with the varying rules of each state, require a careful analysis before a business proceeds with a PTE election in one of the states that now offer it. If you need assistance evaluating whether a PTE election is suitable for you or have any questions, please contact us

Published on August 31, 2021