In recent years, the Pass-Through Entity Tax (PTET) election was one of the most widely utilized strategies for owners of S-corporations, partnerships, and multi-member LLCs seeking to bypass the strict $10,000 federal SALT cap. Under prior law, the ability to deduct state income taxes at the entity level offered a significant advantage. Individual taxpayers who previously could deduct only a limited portion of state income taxes on Schedule A were instead able to shift those taxes to the entity, where they became fully deductible for federal purposes. As a result, PTET quickly became an automatic recommendation for many business owners.
The passage of the One Big Beautiful Bill (OBBB) significantly changes this landscape. Beginning in 2025, the new $40,000 SALT cap dramatically expands the amount of state and local taxes a household can deduct on Schedule A. This means that many taxpayers, particularly those with adjusted gross income (AGI) under $500,000, can now deduct their state income taxes and real estate taxes directly on their personal return without relying on PTET. This single change alters the fundamental cost-benefit analysis of electing PTET.
Taxpayers under $500,000 AGI are uniquely affected because they generally fall within the full Qualified Business Income (QBI) deduction range. For these taxpayers, PTET can lead to an unintended and often overlooked consequence: a reduction in the QBI deduction. Since PTET is paid at the entity level, it reduces the pass-through income that forms the basis of the QBI calculation. As entity-level income decreases, the 20 percent QBI deduction also decreases. Under the prior $10,000 SALT limitation, this tradeoff was often worthwhile because the PTET deduction far outweighed the reduction in QBI. Under OBBB, however, taxpayers are frequently able to deduct the majority of their SALT directly on Schedule A, meaning PTET no longer provides a significant incremental deduction. When combined with the QBI reduction, many taxpayers ultimately find themselves with a smaller overall federal deduction if they elect PTET.
The interaction becomes clearer through a corrected numerical example. Consider a married filing jointly taxpayer with $380,000 AGI, consisting of $250,000 of S-corporation income and $130,000 of wages. The taxpayer is subject to a four percent state income tax rate, resulting in $15,200 of state income tax. The taxpayer also pays $16,000 in real estate taxes and $10,000 in mortgage interest. Under OBBB’s $40,000 SALT cap, the taxpayer is able to deduct the full amount of state income taxes and real estate taxes without relying on PTET. This creates a materially different comparison when evaluating whether electing PTET results in greater federal deductions.
Below is a clear comparison showing the total federal taxable income under each scenario.
| Category | No PTET | With PTET | Difference |
| AGI | $380,000 | $370,000 | PTET lowers AGI by $10,000 |
| Itemized deductions | $41,200 | $31,200 | PTET reduces deductions by $10,000 |
| QBI deduction | $50,000 | $48,000 | PTET reduces QBI by $2,000 |
| Taxable Income | $288,800 | $290,800 | PTET increases taxable income by $2,000 |
The comparison demonstrates that the taxpayer is significantly better off by not electing PTET. Under the no-PTET scenario, the taxpayer receives $91,200 in combined federal tax deductions, compared to $84,000 under the PTET scenario. In this case, PTET reduces total federal deductions by $7,200. This outcome is primarily driven by the taxpayer already being able to deduct the majority of their SALT under the new $40,000 limit and the fact that PTET lowers the QBI deduction.
This example illustrates an important post-OBBB reality: PTET is no longer the default planning strategy for taxpayers under $500,000 AGI. The expanded SALT cap allows many households to fully deduct state income taxes and real estate taxes without shifting those taxes to the entity level. Meanwhile, PTET continues to reduce pass-through income and therefore reduces the QBI deduction. For many taxpayers, the loss of QBI combined with a smaller itemized deduction produces a less favorable federal outcome than simply using Schedule A.
It is still true that PTET remains an effective strategy for certain higher-income taxpayers, particularly those with AGI well above $500,000, limited real estate taxes, or significant state income tax exposure. For these taxpayers, PTET may continue to generate a larger federal deduction than the $40,000 SALT limit allows. However, for taxpayers under $500,000 AGI, the combination of restored SALT deductions and the preserved ability to claim a full QBI deduction often makes PTET less advantageous than it was prior to OBBB.
As a result, PTET should now be evaluated on a case-by-case basis rather than assumed to be the superior option. Taxpayers and practitioners should carefully model the interaction between Schedule A deductions, QBI calculations, entity-level deductions, and overall federal tax exposure to determine whether PTET produces a net tax benefit under the new rules.