A PTET, short for pass-through entity tax, is a state income tax imposed on a partnership or an S corporation at the entity level instead of only on the owners who report its income. Each state writes its own version, and that state’s law decides how the entity becomes liable and whether the owner gets an offsetting credit, deduction or exclusion for what the entity paid. There is no federal PTET, so the rate, the election mechanics and the owner-level benefit are written state by state and the term carries no single national rate.
Where the Tax Comes From
The federal side of this is one notice, and it is narrow. Notice 2020-75 reaches only what it calls a Specified Income Tax Payment, meaning an amount a partnership or S corporation pays to a State, a political subdivision of a State or the District of Columbia to satisfy its own liability for income taxes imposed on it, and that definition holds without regard to whether the entity’s liability is the result of an election (IRS, Notice 2020-75). The same definition excludes income taxes imposed by US territories, so a payment to a territory sits outside it.
What the notice announces is a proposed rule rather than a final one. Under the forthcoming proposed regulations it describes, such a payment is deductible by that entity in computing its non-separately stated income or loss, and it is not taken into account in applying the state and local tax deduction limitation to any individual partner or shareholder, and the notice permits taxpayers to rely on its provisions until those regulations issue (IRS, Notice 2020-75).
What relying on that notice means for a position taken on it, and how the individual cap that prompted these state regimes works, are set out in SALT deduction. Iowa’s guidance ties the two together on the state side: the election may be made for any tax year beginning on or after January 1, 2022 in which the individual limitation on the state and local tax deduction under Internal Revenue Code section 164(b)(6) applies, and after federal legislation the election is no longer scheduled to expire (Iowa Department of Revenue, Pass-Through Entity Tax (PTET)).
Federal law leaves the entity level empty for a partnership or an S corporation, which is the space a PTET fills. The class itself, and which federal return each member of it files, are in pass-through entities.
Why There Is No Single PTET Rate
Virginia taxes electing pass-through entities at a rate of 5.75% (Virginia Tax, Virginia Elective Pass-Through Entity Tax).
California’s elective tax is 9.3% of the qualified entity’s qualified net income, which is the sum of the pro rata or distributive share and guaranteed payments of each qualified taxpayer’s income subject to California personal income tax, and it runs for taxable years beginning on or after January 1, 2021 and before January 1, 2031 (California Franchise Tax Board, Pass-through entity (PTE) elective tax).
The rate and the base are both state choices, so read the rate off that state’s own revenue page before quoting one to a client.
Making the Election Is a State Filing
New York’s PTET is an optional tax that partnerships or New York S corporations may annually elect to pay on certain income for tax years beginning on or after January 1, 2021, imposed under Tax Law Article 24-A (New York State Department of Taxation and Finance, Pass-through entity tax (PTET)).
The window is short and the signer matters. An eligible entity may opt in on or after January 1 but no later than March 15 of the PTET taxable year itself, the election is made online on an annual basis and is irrevocable after the due date of the entity’s first PTET estimated payment, and only an authorized person may make it, so a tax professional cannot make the election on a client’s behalf (New York State Department of Taxation and Finance). A firm can compute the tax and make estimated PTET payments on the entity’s behalf, and still needs the client’s own authorized person to make the election.
California takes the election on the return instead. It must be made on a timely filed original return by filing a completed FTB 3804 with the entity’s return, it cannot be made on an amended return, and once made it is irrevocable for that year and binding on all consenting and nonconsenting partners, shareholders or members (California Franchise Tax Board).
Iowa’s election is voluntary, applies for one tax year only so a separate election is needed each year, and must be made by an individual with authority to sign the entity’s IA 1065 or IA 1120S and bind the entity and its owners (Iowa Department of Revenue).
The Entity Carries Its Own Estimated Payments
An electing New York entity must pay estimated PTET on or before March 15, June 15, September 15 and December 15 in the calendar year prior to the year in which the due date of the return falls, and each quarterly payment should be at least 25% of the required annual payment for the taxable year (New York State Department of Taxation and Finance). The annual PTET return is a separate deadline, due on or before March 15 after the close of the PTET taxable year (New York State Department of Taxation and Finance).
Those payments belong to the entity and stay there. An electing entity may apply its estimated PTET payments only to its New York State or New York City PTET liabilities and not to any other taxes, and it cannot move them into its partners’ own accounts (New York State Department of Taxation and Finance).
California front-loads a single payment. The qualified entity must make the required initial payment by June 15 of the taxable year of the election, being $1,000 or 50% of the PTE elective tax paid for the prior taxable year, whichever is greater, with the remainder due by the due date of the original return without regard to extensions (California Franchise Tax Board).
For the 2026 to 2030 taxable years the missed payment costs the credit rather than the election. An entity that has not made the full June 15 payment may still make a valid PTE elective tax election, and its qualified taxpayers must then reduce their PTE elective tax credit by 12.5% of their pro rata share of the unpaid amount that was due on June 15 (California Franchise Tax Board).
Which Returns Carry It
The federal filing does not change. Iowa states the pairing plainly: an eligible entity is one taxed as a partnership or S corporation that is required to file federal form 1065 and an IA 1065, or federal form 1120-S and an IA 1120S (Iowa Department of Revenue).
The state PTET return is a separate filing on the state’s own form. Every pass-through entity doing business in Virginia or receiving income from Virginia sources files an annual return on Form 502 or Form 502PTET, electing entities file the 502PTET, and that form must be filed electronically (Virginia Tax, Pass-Through Entities). The Elective PTET must be filed and paid electronically, and there is no waiver from that electronic filing requirement (Virginia Tax, Virginia Elective Pass-Through Entity Tax).
Federally the payment moves an income line rather than a deduction line. Iowa’s guidance says a PTET payment meeting the Specified Income Tax Payment definition in section 3.02(1) of Notice 2020-75 may be deductible on the electing entity’s federal income tax return and will reduce the amount of non-separately stated income reported on the owners’ federal Schedules K-1 (Iowa Department of Revenue). Nothing about it appears on the owner’s Schedule A, which is where the individual state and local tax deduction is computed (SALT deduction).
What Reaches the Owner
Two states show how differently the owner’s credit can behave. Virginia’s eligible owners, natural persons and estates or trusts subject to Virginia income tax, may claim a refundable credit on their individual and fiduciary returns equal to their portion of the tax paid by the entity (Virginia Tax, Virginia Elective Pass-Through Entity Tax).
California’s is not refundable. Qualified taxpayers claim a nonrefundable credit for their share of the entity-level tax by filing a completed FTB 3804-CR with their personal return, and unused credits can be carried over for up to 5 years (California Franchise Tax Board).
The arithmetic is simple once the rate and the base are fixed. Take a partnership that makes the Virginia election and pays the 5.75% rate on the income attributable to its eligible owners (Virginia Tax, Virginia Elective Pass-Through Entity Tax):
Income attributable to eligible owners 500,000
Virginia PTET at 5.75% 28,750
Share of an owner holding 40% 11,500The entity pays that tax to Virginia and deducts it in computing its non-separately stated income federally, so the owners’ federal Schedules K-1 carry less income between them, and each owner claims their own share as a refundable credit on the Virginia return. The credit reaches the owner through the state filing, not through the federal Schedule K-1.
What PTET Is Confused With
The SALT Deduction
A PTET is a tax a state charges. The state and local tax deduction is a federal deduction an individual may take for taxes already paid. One is money out to a state, the other is a line on a federal return, and the limitation, the phase-down and the Schedule A mechanics all sit on the deduction side (SALT deduction).
A Composite Return or Nonresident Withholding
A PTET, a composite return and nonresident withholding all move state tax through the entity, and only one of the three is the entity’s own liability. A composite return is a single state return the entity files covering its nonresident owners, and Iowa treats composite tax paid on behalf of a nonresident member as paid by that member, refundable only on that member’s own Iowa return, while an entity that elects the PTET is not required to file the IA PTE-C composite return for that year (Iowa Department of Revenue).
Pass-through entity withholding is the third one, and it is a payment the entity remits rather than a tax on the entity. Virginia takes it on Form 502W, and the automatic extension of time to file does not extend that payment’s due date (Virginia Tax, Pass-Through Entities).
A Pass-Through Entity
The entity is the class and the tax is a charge laid on it. A pass-through entity is a business whose income is reported by its owners; a pass-through entity tax is a state tax that lands on that business anyway. What the class covers, and the federal authority behind it, are in pass-through entities.
Common Questions
It is a state income tax on a partnership or S corporation at the entity level. In a state with an elective regime the entity opts in for the year, pays the state tax itself on a state PTET return alongside its federal return, deducts the payment in computing the non-separately stated income that flows out on the owners’ federal Schedules K-1, and the owners claim a state credit for their share on their own state returns.
The entity’s payment is, on the strength of a notice rather than a final regulation. Notice 2020-75 sets out forthcoming proposed regulations under which a Specified Income Tax Payment is deductible by the partnership or S corporation in computing its taxable income for the taxable year in which the payment is made and is not taken into account in applying the state and local tax deduction limitation to any individual owner, and taxpayers may rely on the notice’s provisions prior to the issuance of those regulations (IRS, Notice 2020-75). How the payment then behaves at the owner level, and what the notice’s reliance date means for a position taken on it, are in SALT deduction.
Accountably places trained offshore tax preparers inside US CPA and EA firms, and a firm can put a block of its own state PTET work through a trial task before any client filing depends on it.
