PTET: How S Corp Owners Can Cut Their Tax Bill

If you own an S Corporation or are a partner in a partnership, there is a powerful tax strategy that many business owners in New York and New Jersey are still not using: the Pass-Through Entity Tax, commonly known as PTET.

This election can save shareholders and partners thousands of dollars every year. Here is what the IRS says about it and how it works.

The SALT Cap Problem

The Tax Cuts and Jobs Act of 2017 limited the federal deduction for state and local taxes (SALT) to $10,000 per year for individuals. For business owners in high-tax states like New York and New Jersey, this cap significantly increased their federal tax burden — they were paying far more in state taxes than they could deduct.

The IRS addressed this directly in Notice 2020-75, which confirmed that pass-through entities — S Corporations and partnerships — may elect to pay state and local income taxes at the entity level. When the entity pays the tax, it is treated as an ordinary and necessary business expense under IRC Section 162, fully deductible with no cap.

This is the legal foundation for every PTET strategy. The IRS explicitly blessed this treatment, giving business owners and their advisors confidence to use it.

How the IRS Treats PTET Payments

According to IRS Notice 2020-75, when a partnership or S Corporation pays a state or local income tax that is imposed on the entity, the payment is deductible by the entity in computing its non-separately stated taxable income or loss for the tax year of the payment.

In plain terms: the state tax is deducted on the business return, reducing the income that flows through to each owner's Schedule K-1. The owners then receive a credit on their state personal return for their share of the PTET paid — so they are not taxed twice.

The IRS also clarified that partners and shareholders are not required to include the PTET payment in their own income as a result of the entity-level deduction. The mechanics are designed to be tax-neutral at the state level while delivering a real federal benefit.

Who Qualifies

The PTET election is available to:

• S Corporations — entities that have made a valid S election under IRC Section 1362
• Partnerships — including multi-member LLCs taxed as partnerships under the check-the-box regulations

C Corporations do not qualify. They already pay tax at the entity level under IRC Section 11 and are not pass-through entities.

Sole proprietors and single-member LLCs taxed as disregarded entities also do not qualify, because there is no separate entity to make the election.

The IRS has confirmed that the PTET election is available in any state that has enacted a qualifying PTET law. Both New York and New Jersey have done so.

The Federal Tax Benefit Explained

Here is a simplified illustration of the benefit:

Without PTET:

• Your S Corp earns $400,000 in profit
• You pay $28,000 in New York state income tax on your personal return
• Your federal Schedule A SALT deduction is capped at $10,000
• $18,000 of state taxes paid produces no federal deduction
• At a 37% federal marginal rate, that costs approximately $6,660 in additional federal tax

With PTET:

• Your S Corp elects PTET and pays the $28,000 state tax at the entity level
• The $28,000 is deducted as a business expense on the S Corp's Form 1120-S
• Your Schedule K-1 income is reduced by $28,000
• You receive a state tax credit on your personal return to avoid double taxation
• The full $28,000 generates a federal deduction — saving approximately $6,660

The higher your state income tax bill, the larger the annual savings.

IRS Guidance on Estimated Payments

The IRS has noted that states may require estimated PTET payments during the tax year. Failure to make timely estimated payments can result in underpayment penalties under IRC Section 6655 (for corporations) or Section 6654 (for individuals, in states that apply the individual rules to the entity).

For New York, estimated PTET payments are due quarterly: March 15, June 15, September 15, and December 15. Your accountant should incorporate these into your annual cash flow plan.

S Corporation Shareholder Consent

For S Corporations, the IRS and most states require that all shareholders consent to the PTET election. This is because the election affects each shareholder's individual tax situation — specifically, their state tax credit. Before making the election, every shareholder should review the impact with their own tax advisor.

For partnerships, the managing partner or a majority of partners typically authorizes the election, depending on the partnership agreement and state law.

What the IRS Says About the Credit

A key concern for business owners is double taxation: if the entity pays the state tax, will the owner also owe state tax on the same income?

The IRS addressed this in Notice 2020-75 by confirming that the PTET framework is designed to work in conjunction with a corresponding state-level credit. The credit offsets the owner's personal state tax liability by their share of the PTET paid. The federal deduction is the benefit; the state credit is the offset that prevents double taxation.

If a state's PTET law does not provide a corresponding credit, the analysis changes — but both New York and New Jersey provide the credit.

Multi-State Owners

If your S Corp has shareholders who are residents of states other than New York or New Jersey, the PTET credit may not be available to them in their home state. The IRS does not control how other states treat the credit — each state sets its own rules.

For businesses with owners in multiple states, a careful state-by-state analysis is essential before making the election. The federal benefit is the same for all shareholders, but the state credit situation varies.

The Deadline Matters

The PTET election has strict annual deadlines set by each state. In New York, the election must be made by March 15 of the tax year for calendar-year entities. Missing the deadline means forfeiting the benefit for that entire year.

If you have not yet elected PTET for the 2026 tax year, the window is still open. The sooner you make the election and begin making estimated payments, the more of the deduction you preserve.

Work With a Qualified Tax Professional

PTET is well-established in IRS guidance, but the details matter — especially for S Corporations with multiple shareholders, owners in different states, or complex ownership structures. A qualified Enrolled Agent or tax professional can model the exact savings for your situation, handle the election filing, and set up your estimated payment schedule.

At OnPoint Business Tax & Accounting, we have helped S Corp owners and partners throughout New York and New Jersey implement PTET strategies that deliver real, measurable tax savings every year. Book a free consultation and we will run the numbers for your business.

---

Sources: IRS Notice 2020-75; IRC Section 162; IRC Section 1362; IRS Publication 541 (Partnerships); IRS Form 1120-S Instructions. For the most current guidance, visit IRS.gov.