Pass-Through Entity Taxes (PTET): Should Your LLC Opt In for 2025?

Introduction

Imagine reducing your federal tax burden while keeping your LLC compliant and strategically positioned for growth in 2025. That possibility might lie in one critical tax election: opting into a Pass-Through Entity Tax (PTET). As tax laws continue to evolve in the United States, PTET is gaining traction as a powerful workaround to the $10,000 State and Local Tax (SALT) deduction cap imposed by the Tax Cuts and Jobs Act (TCJA).

The Internal Revenue Service (IRS) has allowed states to create PTET regimes that help pass-through entities—like LLCs, S-corporations, and partnerships—deduct state taxes at the entity level. But should your LLC opt in?

In this blog, we’ll explore what PTET is, how it works, which states have adopted it, and the key factors your LLC should consider before making the election for 2025.

What is the Pass-Through Entity Tax (PTET)?

Understanding PTET Basics

Pass-through entities (PTEs) don’t pay corporate income tax. Instead, their income “passes through” to the owners’ individual tax returns, where it’s taxed at personal income tax rates. The challenge? The $10,000 cap on SALT deductions limits how much owners can deduct on their federal returns.

PTET allows an entity to pay state income taxes directly—deducting the full amount as a business expense, not limited by the SALT cap. This effectively restores the SALT deduction above the $10,000 limit.

IRS Approval and State Implementation

In 2020, IRS Notice 2020-75 confirmed that entities paying PTET could deduct state taxes at the entity level. Following this, more than 30 states, including California, New York, Illinois, and Texas, adopted PTET programs by 2024, and more are expected to join by 2025.

Why PTET Matters in 2025

The PTET election is especially relevant for 2025 because:

• SALT cap remains in effect until at least 2026.
• More states have refined their PTET rules and processes.
• Businesses are increasingly using PTET to manage federal tax liability.

States Offering PTET in 2025

Here are a few examples of states that currently offer PTET programs:

• California: Offers an elective tax at 9.3% of qualified net income.
• New York: Allows PTEs to pay at a rate of 6.85% to 10.9%, depending on income.
• Illinois: Flat 4.95% entity-level tax.
• Texas: Though it doesn’t have a state income tax, Texas provides franchise tax flexibility for PTEs.

Check with your state’s Department of Revenue for the most up-to-date guidance, as rates and eligibility vary.

Pros and Cons of Electing PTET for Your LLC

Benefits

1. Federal Tax Savings: Entity-level deductions bypass the $10,000 SALT cap.
2. No Double Taxation: Most states offer owner-level tax credits to offset PTET paid.
3. Simplicity for Multi-Member LLCs: Pass-through taxation is maintained.

Potential Drawbacks

1. Complexity in Multi-State Operations: If your LLC operates in multiple states, compliance can get tricky.
2. Cash Flow Considerations: Paying taxes at the entity level may require earlier cash outflows.
3. State-Specific Rules: Not all states offer PTET, and some may impose limits.

How to Elect PTET in Your State

Each state sets its own rules. Here’s a general process to opt in:

1. Check Eligibility: Confirm your LLC qualifies as a pass-through entity under state law.
2. Review Timing: Most states require election before a certain date (e.g., March 15 in California).
3. Make the Election: File the appropriate form with your state’s tax department.
4. Estimate and Pay Taxes: Make quarterly estimated PTET payments to avoid penalties.
5. Report on Federal Return: Deduct the PTET paid as a business expense on IRS Form 1065 (partnerships) or 1120S (S-corps).
   

Example: Opting In for PTET in New York

• File online through the NY Business Online Services portal.
• Must elect by March 15 of the tax year.
• Owners receive a PTET credit on their individual New York tax returns.

Is PTET Right for Every LLC?

Factors to Consider

• Income Level: The more taxable income your LLC generates, the greater the PTET benefit.
• Owner Location: If members live in non-PTET states, they may not benefit equally.
• State Conformity: States vary on how they treat PTET credits and filings.
• Administrative Burden: Consider if your team or accountant can handle the added complexity.

Conclusion

PTET can be a powerful tool for reducing federal tax liability, especially for high-income LLC owners in states with personal income tax. However, it’s not a one-size-fits-all solution. Carefully analyze your LLC’s structure, income level, and operating states before opting in for 2025.

Consulting with a knowledgeable tax advisor can help ensure your LLC makes the most informed decision.

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