The pass-through entity tax landscape changed again in 2025, and businesses that made a PTET election two years ago may be working with outdated assumptions. The One Big Beautiful Bill Act raised the federal SALT deduction cap from $10,000 to $40,000 for most filers, directly reducing the federal tax benefit that drove many S-corporations, partnerships, and LLCs to elect entity-level state taxation in the first place. At the same time, states continue to extend, simplify, and expand their own pass-through entity tax regimes, creating a moving target for both tax planning and financial reporting.
This article explains the current state of pass-through entity tax elections, the two defensible GAAP reporting approaches under ASC 740, and the practical steps businesses should take before making or renewing an election.
How the One Big Beautiful Bill Act changed PTET planning
The Tax Cuts and Jobs Act of 2017 capped the federal deduction for state and local taxes (SALT) at $10,000 per return. That cap created a strong incentive for pass-through entity owners to elect entity-level state income tax payments, which bypass the individual SALT cap entirely. IRS Notice 2020-75 confirmed these entity-level payments remain federally deductible, and states rapidly built PTET regimes to take advantage of the workaround.
In 2025, the One Big Beautiful Bill Act (OBBBA) raised the SALT cap to $40,000 ($20,000 for married filing separately) for tax years 2025 through 2029. The cap phases down for filers with adjusted gross income above $500,000 and increases by 1% annually until 2030, when it reverts to $10,000.
What the higher SALT cap means for PTET elections
The increased cap reduces the federal tax benefit of a pass-through entity tax election for many business owners, particularly those in lower-tax states or with moderate state income tax liabilities. If an owner’s total state and local taxes fall below $40,000 and the owner’s adjusted gross income stays under the phase-down threshold, the PTET election may produce little or no net federal benefit, because the owner could claim the deduction on their individual return without the election. Owners above the $500,000 phase-down threshold are a different story, since the cap shrinks as income rises and a PTET election can still help even when state taxes are below $40,000.
In high-tax states like California, New York, and New Jersey, the PTET election still delivers meaningful savings for owners whose state tax obligations exceed the new cap. For a partner in a New York LLC with $200,000 in state income tax, the $40,000 cap still leaves $160,000 that would be non-deductible without a PTET election.
The temporary nature of the OBBBA increase is equally important. Because the $40,000 cap applies only through 2029, pass-through entity tax elections remain a relevant planning tool for the foreseeable future. Businesses should model scenarios that account for the 2030 reversion to $10,000, which would restore much of the PTET election’s value.
Which states offer pass-through entity tax elections
More than 35 states and New York City now offer pass-through entity tax regimes. Several made significant changes in 2025 and 2026 that affect election timing, eligibility, and compliance requirements.
Key state PTET updates for 2025 to 2026
California extended its PTET program through 2030. For tax years 2026 through 2030, entities can make a valid election even if they miss or underpay the June 15 prepayment, giving businesses more flexibility to evaluate the benefit before committing. The tradeoff is that the credit available to owners is reduced by 12.5% when the prepayment requirement is not met.
Michigan extended the election deadline to the ninth month after the end of the tax year, September 30 for calendar-year filers, providing substantially more time to assess whether the election is worthwhile.
Alabama simplified its process by allowing the PTET election directly on the entity’s income tax return, eliminating the separate filing requirement that previously applied.
Oklahoma extended the election deadline to the return due date, including extensions, removing the earlier-in-the-year deadline that forced premature decisions.
Maryland expanded the PTET tax base for resident members effective 2026. This change introduces a compliance risk for S-corporations with mixed-residency ownership, because the differing tax treatment among shareholders could be interpreted as creating a second class of stock, potentially jeopardizing S-corporation status.
New York maintained its early-in-the-year deadline, with the 2025 election due March 17, 2025.
Why state variations matter for GAAP reporting
Each state’s pass-through entity tax regime has different rules about who bears the economic burden, how credits flow to owners, and whether elections are mandatory or optional. These variations directly affect how the tax should be classified under GAAP, a question FASB has not yet resolved with specific guidance.
GAAP reporting for pass-through entity taxes: ASC 740 vs. distribution treatment
FASB has not issued specific guidance on how to account for pass-through entity tax payments in GAAP financial statements. As of mid-2026, this remains an area of professional judgment, and reporting entities must choose between two defensible approaches.
Treating PTET as an income tax under ASC 740
Under this approach, the entity treats the pass-through entity tax as an income tax under ASC 740. The entity reports a tax provision, current taxes payable, and any deferred tax effects on the income statement.
This treatment aligns with how the tax functions economically: it is calculated on entity income and remitted to the state. It reflects the tax liability and any deferred tax impacts transparently in the financial statements and is the stronger position when state law assigns the economic burden to the entity rather than the owners.
The tradeoff is complexity. ASC 740 treatment requires full income tax accounting, including analysis of temporary differences, deferred tax assets or liabilities, and valuation allowances. It also increases complexity in audit preparation and financial statement disclosures, and it interacts with the new income tax disclosure requirements under FASB ASU 2023-09, which are effective for public entities for periods beginning after December 15, 2024, and for private entities after December 15, 2025.
Treating PTET as a distribution to owners
Under the distribution approach, the entity treats the pass-through entity tax payment as a reduction in equity rather than a tax expense on the income statement. This method avoids the full ASC 740 framework, deferred tax calculations, and rate reconciliation disclosures.
Distribution treatment is appropriate when the owners, not the entity, bear the ultimate economic burden of the tax, and when the election is effectively a mechanism for funding the owners’ individual tax obligations. It keeps the income statement cleaner for lenders and other financial statement users who focus on pre-tax operating performance.
The risk with distribution treatment is that it does not reflect the economic substance of the tax on the income statement if the entity truly bears the cost. Some state PTET regimes assign liability at the entity level, making distribution treatment harder to justify under those statutes.
How to determine which GAAP treatment applies
Practitioners commonly weigh several factors that help determine which approach fits a given state’s pass-through entity tax regime. The AICPA and its practice resources point to the following considerations:
- State law language on economic burden. Does the statute assign the tax obligation to the entity or to the owners?
- Owner-level filing requirements. Do owners still file individual state returns and claim credits?
- Mandatory vs. optional election. A mandatory entity-level tax looks more like an income tax under ASC 740.
- Joint and several liability. If the entity is jointly liable, ASC 740 treatment is more supportable.
- Credit carryforward provisions. Credits that carry forward at the owner level suggest the economic burden rests with the owners.
Whichever approach an entity selects, the accounting policy should be documented in a Topic 740 memo that addresses taxes payable or refundable, deferred tax impact (if applicable), and management’s intent regarding the election on a go-forward basis.
Practical steps for evaluating a PTET election
Whether your business is considering a first-time pass-through entity tax election or reassessing a prior decision in light of the OBBBA changes, these steps provide a structured evaluation framework.
Step 1: Quantify the federal benefit under the new SALT cap
Model each owner’s state tax liability against the $40,000 cap. If most owners’ state taxes fall below the cap, the PTET election may no longer produce a net federal benefit. Include the AGI phase-down in your calculations for owners above $500,000.
Step 2: Review your state’s PTET rules and recent changes
Confirm election deadlines, estimated payment requirements, credit mechanics, and any 2025 to 2026 amendments. Several states have simplified or extended their processes, which may change the cost-benefit analysis.
Step 3: Assess the GAAP reporting impact
Determine whether ASC 740 or distribution treatment better reflects the substance of your state’s regime. Document the analysis in a Topic 740 memo before the election deadline.
Step 4: Evaluate multi-state complications
Entities operating in multiple PTET states may need to apply different accounting treatments depending on each state’s rules. Mixed-residency ownership in S-corporations requires special attention, particularly in Maryland after its 2026 base expansion.
Step 5: Coordinate tax advisory and audit teams
The PTET election decision sits at the intersection of tax planning, financial reporting, and liquidity management. Aligning these functions before the election deadline avoids surprises during audit season. Coordinating tax advisory services with audit and assurance services early keeps the planning and reporting decisions consistent.
Step 6: Plan for the OBBBA sunset
The $40,000 SALT cap applies only through 2029. Build scenario models that account for the reversion to $10,000 in 2030, which would restore much of the pass-through entity tax election’s value for owners in nearly every state.
What to expect from FASB on PTET accounting
FASB has not signaled plans to issue specific pass-through entity tax accounting guidance. Until it does, reporting entities should expect continued diversity in practice and should be prepared to defend their chosen approach with clear documentation and consistent application.
The interaction between the OBBBA’s temporary SALT cap increase and the expanding state PTET landscape makes this a dynamic area. Businesses that treated the PTET election as a one-time decision should revisit it annually, particularly as state rules change and the 2030 SALT reversion approaches.
Frequently Asked Questions
What is a pass-through entity tax?
A pass-through entity tax is a state-level income tax paid by S-corporations, partnerships, or LLCs at the entity level rather than on the owners’ individual returns. The election allows entity-level payments to bypass the federal SALT deduction cap, preserving the full federal deductibility of state income taxes for the business’s owners.
Is pass-through entity tax deductible on a federal return?
Yes. IRS Notice 2020-75 confirmed that state income taxes paid at the entity level by pass-through entities are deductible as a business expense on the entity’s federal return. This deduction is not subject to the individual SALT cap, which is the primary reason PTET elections exist.
How do you report PTET payments under GAAP?
FASB has not issued specific guidance, so entities choose between two approaches: treating the PTET as an income tax under ASC 740 (with a full tax provision on the income statement) or treating it as a distribution to owners (recognized as a reduction in equity). The choice depends on which party, the entity or the owners, bears the economic burden under the state’s specific statute.
Does the $40,000 SALT cap eliminate the need for a PTET election?
Not necessarily. The higher cap reduces the benefit for owners with moderate state tax liabilities, but owners in high-tax states whose obligations exceed $40,000 still benefit significantly from a PTET election. The cap also reverts to $10,000 in 2030, which would restore the election’s value for most pass-through entity owners.
Which states currently offer PTET elections?
More than 35 states and New York City offer pass-through entity tax regimes as of 2026. Major states include California, New York, New Jersey, Illinois, Michigan, Alabama, Oklahoma, Maryland, and Virginia. Each state has different election deadlines, credit mechanics, and eligibility rules, so businesses must evaluate the specifics of each applicable state.
What risks does a PTET election create for S-corporation status?
In states like Maryland, where the PTET tax base differs for resident and nonresident members, the differing tax treatment among shareholders could be interpreted as creating a second class of stock. The IRS has not issued definitive guidance on this issue, so S-corporations with mixed-residency ownership should evaluate the risk carefully before making a PTET election in affected states.
