Tax Strategy Tuesday: PTE Elections - A Powerful Tax Savings Tool
Written By BEC CFO & CPA
If you operate a business in a state that levies income tax, you have to pay those taxes no matter what. The Pass-Through Entity (PTE) Election simply lets you do it in a way that can save you thousands of dollars in federal taxes.
What is the PTE Election?
The PTE election allows certain businesses — S corporations, partnerships, and LLCs taxed as partnerships — to pay state income tax at the entity level instead of you paying it personally. This shift means the business deducts the tax in full on its federal return, lowering the income that flows through to you.
Why is it beneficial?
Most taxpayers don’t get to deduct their state taxes at all, because they take the standard deduction and get no additional benefit. Even for those who itemize, the State and Local Tax (SALT) deduction is capped at $10,000 under current law. The PTE election bypasses those limits, letting you deduct 100% of your state income tax at the business level.
Example: With vs. Without the PTE Election
Let’s say you’re a business owner with $500,000 of income (AGI) and $50,000 of state income tax from your business return.
Without PTE election: On your personal return, you either (a) take the standard deduction (no benefit from state tax) or (b) itemize and deduct only $10,000 of state tax, losing $40,000 in deductions.
With PTE election: Your business deducts the full $50,000 against its federal income before it flows to you. That’s $40,000 more in deduction.
Statistically, most taxpayers opt for the standard deduction and thus don't realize a benefit from the state taxes they pay. Utilizing the PTE election allows taxpayers to stack the standard deduction with an additional 100% state tax write-off. This is real cash savings simply by changing how the state tax is paid.
What to do next:
Each state has its own rules and deadlines for making the PTE election and missing them means losing the benefit for the year. If you own a pass-through business, have significant state tax, and especially if your income is over $500,000, the PTE election could mean thousands in tax savings.
If you’d like us to review whether the PTE election makes sense for you, please reach out to our team and we’ll walk you through the process.