PTE tax: state pass-through entity tax elections by state
A PTE tax is an elective state income tax that a partnership or S corporation pays at the entity level, with a state credit or exclusion for its owners. Under IRS Notice 2020-75, the entity deducts the payment from non-separately stated income, so it stays outside the owners' federal SALT deduction limit.
“If a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made.” IRS, Notice 2020-75
What is a PTE tax?
A pass-through entity tax (PTET) is a state income tax that a partnership or S corporation elects to pay on its own return, with the owners getting a state credit or exclusion in return. IRS Notice 2020-75 is the federal basis. The notice calls these amounts Specified Income Tax Payments and says the Treasury and the IRS intend to propose regulations confirming that the entity deducts them in computing its non-separately stated income. The rules apply to payments made on or after November 9, 2020, and section 4 of the notice lets taxpayers rely on them before the regulations are issued. Section 3.02 of Notice 2020-75 sets four rules:
- What counts. Income tax paid to a state, a political subdivision of a state or the District of Columbia, including tax imposed because the entity elected it. Taxes of U.S. territories are excluded (section 3.02(1)).
- When it is deducted. In the taxable year the payment is made (section 3.02(2)).
- How it flows. Not separately stated. It reduces each owner's share of non-separately stated income or loss on Schedule K-1 (section 3.02(3)).
- The owner's SALT limit. Not taken into account in applying the SALT deduction limitation to any partner or shareholder (section 3.02(4)).
For 2025 returns, the Instructions for Schedule A (2025) put the individual SALT limit at $40,000 ($20,000 married filing separately), reduced when modified AGI is over $500,000 but not below $10,000.
Which states have an elective PTE tax?
The table below lists, for each of the 50 states, whether an elective PTET is available and the official state source checked. “Yes” means the state revenue department or statute describes an entity-level election for partnerships and S corporations. “No individual income tax” means the state revenue department says the state does not impose an individual income tax, so there is no owner-level tax for a PTET to replace. “Verify” means the answer was not confirmed on an official state page and the row needs checking before anyone relies on it. Election deadlines, rates, eligible owners and credit rules differ by state and are left to each state's source.
Some PTETs were written to end with the federal SALT limitation. The California FTB lists taxable years beginning before January 1, 2031. The Oregon DOR says Senate Bill 1510 extends PTE-E through tax years beginning before January 1, 2028. A Minnesota DOR bill analysis says Minnesota's tax expired after tax year 2025.
Where does a PTE tax payment go on the federal return?
A PTE tax payment reaches the federal return through the entity, not the owner. Under Notice 2020-75, the partnership or S corporation deducts the payment on page 1 in the year paid, and each owner's share of the lower ordinary business income shows up in box 1 of Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120-S). The owner's share of the tax paid is reported on the state K-1 or credit statement and claimed on the owner's state return. It does not go on the owner's Schedule A.
| Document | What it shows | Where it goes |
|---|---|---|
| State PTET payment confirmation | Date and amount paid | Deduction in the year paid: Form 1065 14 or Form 1120-S 12 (taxes and licenses) |
| State PTET election or return | Tax year elected, owners included | State return only; sets which year the credit belongs to |
| Federal Schedule K-1 | Ordinary business income after the PTET deduction | Form 1065 23 or Form 1120-S 22, to K-1 box 1 |
| State K-1 or PTET credit statement | Owner's share of tax paid | Owner's state return credit; not Schedule A 5a |
The Instructions for Form 1065 and Form 1120-S (2025) do not name PTET payments on a specific line. Line 14 on Form 1065 and line 12 on Form 1120-S cover taxes paid or incurred in the trade or business, and the PTET reaches the same box 1 result either way. See Form 1065 for the full return.
What does the federal deduction from a PTE tax look like?
For example, a calendar-year partnership has two equal individual partners and $1,000,000 of ordinary business income before any PTET for 2025. It elects its state's PTET and pays $50,000 in December 2025. Partner A has $800,000 of modified AGI, so under the Instructions for Schedule A (2025) his SALT limit is $40,000 less 30% of the $300,000 over $500,000, which floors at $10,000. His $15,000 of property taxes already exceed that. The example assumes a 35% federal marginal rate for Partner A.
| Step | Form line | Amount |
|---|---|---|
| Ordinary income before the PTET | Form 1065, page 1 | $1,000,000 |
| PTET paid in December 2025 | Form 1065 14 | $50,000 |
| Ordinary business income | Form 1065 23 | $950,000 |
| Partner A's 50% share | Schedule K-1 (Form 1065), box 1 | $475,000 |
| Partner A's share without the election | Schedule K-1 (Form 1065), box 1 | $500,000 |
| Extra SALT deduction if A paid $25,000 himself | Schedule A 5e | $0 |
| Federal tax saved by Partner A at 35% | $25,000 × 35% | $8,750 |
Partner A's federal income drops by his $25,000 share of the PTET. Without the election he would pay the $25,000 himself and get nothing extra on Schedule A, because line 5e is already at the limit. Partner B gets the same $25,000 reduction, and each partner then claims a state credit or exclusion for their share under the state's own rules.
What do reviewers check on a PTE tax election?
A reviewer checking a PTE tax election confirms six items, each tied to Notice 2020-75, the federal forms or the state's own source. The state payment confirmation is the first document to pull, because the payment date decides the federal deduction year and the payee decides whether the payment qualifies at all. The state election is the second, because each state sets its own available years and deadlines, and a missed election leaves the tax with the owners.
The owner's state return is the last place to look, because a credit claimed there that doesn't match the entity's payment points to a timing or ownership difference to resolve. For an S corporation, the same checks run against Form 1120-S line 12 and box 1 of each shareholder's K-1.
Every line checked against the documents the client sent
Filed reads the client's state PTET elections, payment confirmations, K-1s and prior-year return, then checks every PTET deduction and owner credit against them. Anything that doesn't tie comes back as a review item with a citation to the source.
Book a demoForm 1065 line 14 includes $62,000 of state PTET, but the payment confirmations show $40,000 paid in 2025 and $22,000 paid on April 15, 2026. Confirm whether the $22,000 belongs on the 2026 return under Notice 2020-75.
Common questions
Is a PTE tax payment deductible for federal purposes?
A PTE tax payment is deductible by the partnership or S corporation for federal purposes under IRS Notice 2020-75. The entity deducts it in the year paid in computing non-separately stated income, and it is not counted against any owner's SALT deduction limit. Taxpayers may rely on the notice until the proposed regulations it describes are issued.
Does the higher 2025 SALT limit make a PTE election unnecessary?
The higher 2025 SALT limit does not make a PTE election unnecessary for every owner. The Instructions for Schedule A (2025) set the limit at $40,000, reduced when modified AGI is over $500,000, but never below $10,000. Owners whose state and local taxes exceed their limit still have taxes the cap blocks, which an entity-level payment avoids.
Does an entity-level tax paid to a U.S. territory qualify under Notice 2020-75?
An entity-level tax paid to a U.S. territory does not qualify under Notice 2020-75. The notice limits Specified Income Tax Payments to income taxes paid to a state, a political subdivision of a state or the District of Columbia, and it expressly excludes income taxes imposed by U.S. territories or their political subdivisions.