The pass-through entity tax, or PTET, landscape began to stabilize following the enactment of the tax-and-spending package last July and ensuing state legislation. States generally haven’t abandoned PTET. Many have extended their regimes, and a few have newly adopted PTET. This gives taxpayers more certainty that it will remain an important state and local tax planning tool.
But the benefits of a PTET election aren’t automatic. They will depend on factors such as the tax package’s increased SALT cap, its effect on the PTET base, newly adopted sourcing rules (such as California’s look-through rule for asset management fees), PTET credit flows in tiered PTE structures, and resident credit utilization.
Although the tax package may have reduced some uncertainty around the PTET’s future, it also may have made planning more complex.
More Certainty
The PTET landscape has continued to evolve over the past year, with Maine adopting it for the first time; Illinois, Utah, and Virginia making their regimes permanent; and California, Minnesota, and Oregon extending their programs.
These changes suggest that the PTET is still an important and increasingly established SALT planning option, with most states that impose an income tax now having no sunset date tied to their programs. Taxpayers should welcome that certainty. It allows partnerships, S corporations, and their owners to include the PTET in multiyear tax planning rather than treating it as a temporary year-end opportunity.
More State-by-State Complexity
Greater certainty doesn’t mean greater simplicity. The next planning phase may require more state-by-state and owner-by-owner analysis than before.
First, the federal benefit is no longer automatic. The temporary increase in the SALT cap may reduce the potential PTET benefit for some owners, especially those whose state tax liabilities are small and can already be partially or fully deducted at the individual level. But for higher-income owners, the PTET’s value should still be available because of the scheduled reversion to a lower cap in future years.
Second, the state-by-state complexity also extends to the PTET base. The tax package changed some key federal income tax rules, including the Internal Revenue Code Section 163(j) business interest expense, Section 174 research and experimental expenditures, and Section 168(k) bonus depreciation.
States don’t uniformly conform. Some states may adopt the tax law’s rules on a rolling basis, while others may continue to apply fixed-date conformity, pre-Tax Cuts and Jobs Act rules, or post-TCJA but pre-2025 tax law treatment.
For entities with significant business interest expenses, research and development expenditures, or bonus depreciation, these differences can cause the PTET base to vary materially from federal income and from state to state. This makes modeling essential to determine both the PTET liability and the corresponding owner-level benefit.
Third, for asset managers, sourcing changes may further affect the PTET base. Starting from tax year 2026, California’s revised market-based sourcing rules require asset management receipts to be sourced using a look-through approach based on underlying investors or beneficial owners’ locations. Because California requires a mandatory PTET prepayment by June 15 each year, asset managers that are weighing the election may want to revisit this look-through analysis sooner than usual.
Other states may apply similar market-based or look-through concepts, which can affect sourcing and the resulting PTET benefit. Asset managers should consider whether investor-location data is available early enough to support both sourcing and PTET modeling before key payment deadlines.
Fourth, credit flows can become especially complicated in tiered structures. Where a partner is itself a PTE, states don’t always agree on whether the PTET credit should be claimed at the upper-tier PTE level or passed through to the ultimate owners.
For example, Illinois demonstrates a stricter flow-through approach. Its instructions provide that an upper-tier PTE may not use the credit to offset its own PTE tax liability, and it must be distributed to its own partners.
By contrast, Nebraska takes a more flexible approach, allowing an upper-tier partnership that receives credit from a lower-tier partnership either to claim the credit itself or redistribute it to its partners. These variations can affect the credit’s timing and usability.
Fifth, resident credit rules can significantly affect the outcome. A multistate partnership may elect the PTET in a source state, but the owner’s resident state may not provide a full credit for that tax. This is crucial for owners residing in states that haven’t adopted a broad PTET regime or that don’t fully conform to other states’ treatment. Pennsylvania is still a holdout state to date, and the resident owner’s PTET credits may not be recognized.
This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Shail Shah is a principal in BDO’s state and local tax practice.
Zexian (Mark) Liu is a tax manager at BDO.
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