By Joe Wallin | April 2026 | ~8 min read
If you own a stake in an S corporation, partnership, or LLC taxed as a partnership, there is a tax election you need to understand. It's called the pass-through entity tax election — or PTE election — and it may be the single most valuable tax planning tool available to business owners right now.
The PTE election exists because of a problem created by Congress. And understanding that problem is the key to understanding why this election matters so much.
The Problem: The SALT Cap
In 2017, the Tax Cuts and Jobs Act (TCJA) capped the federal deduction for state and local taxes (SALT) at $10,000 per year. For business owners in states with income taxes, this was a gut punch. If you lived in California, New York, New Jersey, or any other state that taxes individual income, you could no longer fully deduct those state taxes on your federal return.
The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the cap to $40,000 for 2025 and $40,400 for 2026 (with 1% annual increases through 2029, then a reversion to $10,000 in 2030). But there is a catch that matters for this blog's readers: the expanded cap phases out for taxpayers with modified AGI above $500,000, declining by 30 cents for every dollar over that threshold (though it never drops below $10,000). For most founders and high-earning professionals, the effective SALT cap is far below $40,400 — and it may still be only $10,000.
For a founder or investor paying $200,000 or more in state income tax, the SALT cap means a large chunk of that payment is simply not deductible. At a 37% marginal federal rate, that's real money left on the table.
The Workaround: The PTE Election
States figured out a workaround, and the IRS blessed it.
The idea is elegant: instead of the individual owner paying state income tax on their share of the business's income, the entity itself elects to pay the tax at the entity level. The entity then deducts that tax payment as a business expense on its federal return. Because it's a business expense — not an itemized state and local tax deduction — it is not subject to the SALT cap.
The individual owner, in turn, receives a credit on their state return for the tax the entity paid on their behalf, so they are not double-taxed.
The net effect: state income tax that would have been trapped by the SALT cap becomes a fully deductible business expense. For owners in the 37% federal bracket, this can reduce the effective state tax rate by roughly a third.
IRS Blessing: Notice 2020-75
In November 2020, the IRS issued Notice 2020-75, announcing its intention to issue proposed regulations confirming that entity-level state income taxes paid by partnerships and S corporations are deductible by the entity in computing its non-separately stated taxable income. This was the green light states had been waiting for. Within two years, the number of states offering PTE elections exploded.
The IRS has not yet issued final regulations, but Notice 2020-75 has been treated as reliable guidance, and the PTE election has now survived multiple rounds of federal tax legislation — including the One Big Beautiful Bill Act, which preserved the workaround despite a House proposal that would have restricted it for specified service trades or businesses (SSTBs) like law firms, accounting firms, and medical practices.
The bottom line: the PTE election is here to stay.
How the PTE Election Works (General Mechanics)
While the specifics vary state to state, the basic mechanics are consistent:
1. The entity makes an election. The partnership, LLC, or S corporation elects to pay state income tax at the entity level. This is typically an annual election made on the entity's state tax return or a separate election form.
2. The entity pays the tax. The entity calculates and pays state income tax on the pass-through income that would otherwise be reported on its owners' individual returns.
3. The entity deducts the payment. Because the entity paid the tax — not the individual — it is treated as a business expense and deducted on the entity's federal return (Form 1065 or 1120-S). This deduction is not subject to the SALT cap.
4. Owners receive a credit. Each owner receives a credit on their individual state tax return for their share of the entity-level tax, preventing double taxation.
5. The federal savings flow through. Because the entity-level deduction reduces the entity's federal taxable income, each owner's share of federal taxable income is lower, producing real federal tax savings.
The National Landscape: 36+ States and Counting
As of 2026, over 36 states plus New York City have enacted elective PTE tax regimes. Only a handful of states with a personal income tax on pass-through income have chosen not to adopt one — Delaware, Maine, North Dakota, Pennsylvania, and Vermont.
The programs vary in important ways. Election timing differs: some states require elections by March 15, others allow elections on extended returns. Payment requirements range from estimated quarterly schedules to lump-sum prepayments. And the credit mechanics differ — some states offer refundable credits, others nonrefundable credits with carryforward provisions.
But the core principle is the same everywhere: convert an individual-level state tax obligation into a deductible entity-level expense.
Washington's PTE Election: Section 502 of ESSB 6346
Washington's new income tax — a 9.9% tax on individual income exceeding $1 million — was signed into law on March 30, 2026. The income tax takes effect for tax years beginning January 1, 2028, with first returns and payments due in 2029.
Embedded in the same legislation is Washington's own PTE election, found in Section 502 of ESSB 6346. The PTE election also takes effect for tax years beginning January 1, 2028.
Here is how Washington's version works:
Eligible entities. Partnerships, LLCs taxed as partnerships, and S corporations may elect to pay the 9.9% income tax at the entity level on behalf of qualifying owners. C corporations are not eligible.
Election mechanics. The election is made annually and is irrevocable for the tax year once made. The filing deadline for the election is June 15 of the relevant tax year. Each owner may opt in or opt out of the election — the entity does not need unanimous consent.
Tax base. For resident owners who opt in, the entity pays 9.9% on their entire distributive share of entity income. For nonresident owners, the tax applies only to the Washington-source portion of their distributive share.
Owner credit. Owners who participate in the election receive a credit under §206 of the act for their share of the entity-level tax paid, offsetting their individual Washington income tax liability.
The federal benefit. Because the entity-level tax is deductible on the entity's federal return, the effective Washington tax rate drops from 9.9% to approximately 6.2% for owners in the 37% federal bracket. That is a meaningful reduction — nearly a third off the headline rate.
B&O tax overlap. Beginning in 2028, there is a potential double-taxation issue: the entity pays the PTE tax and may also owe Washington's Business & Occupation (B&O) tax. Section 204 of the act provides a credit to address this overlap, but the credit is imperfect — service-based businesses (which pay B&O at 1.5%) fare better than retail or manufacturing businesses (which pay at lower B&O rates). This is something to model carefully with your CPA.
DOR rulemaking. The Department of Revenue has been delegated authority under §401 to establish estimated payment schedules, safe harbor thresholds, and administrative procedures. Those rules have not yet been finalized — watch for DOR guidance in late 2027.
For a deeper dive into how Washington's income tax applies to S corps, LLCs, and partnerships — including K-1 sourcing, guaranteed payments, and nonresident apportionment — see Washington's New Income Tax and Pass-Through Business Income.
A Worked Example
Consider a two-member LLC taxed as a partnership, generating $3 million in net income annually, split equally. Both members are Washington residents.
Without the PTE election: Each member reports $1.5 million in Washington income and pays 9.9% on the amount exceeding $1 million — roughly $49,500 each in Washington income tax. On their federal returns, this $49,500 is an individual state tax payment subject to the SALT cap. If they have already used their $40,400 SALT cap on property taxes and other state obligations, none of the Washington tax is federally deductible.
With the PTE election: The LLC elects to pay the 9.9% tax at the entity level. The entity pays $99,000 in Washington PTE tax ($49,500 attributable to each member). This $99,000 is deducted on the LLC's federal return as a business expense — no SALT cap. Each member's share of federal taxable income drops by $49,500. At a 37% marginal rate, that is a federal tax savings of approximately $18,315 per member — or $36,630 total.
Each member also receives a §206 credit on their Washington return for the $49,500 of entity-level tax paid on their behalf, so they owe no additional Washington income tax.
The effective Washington tax rate with the PTE election: approximately 6.2% instead of 9.9%.
Who Should Consider the PTE Election?
The PTE election is most valuable for:
- Owners of S corps, partnerships, and LLCs who have Washington income exceeding $1 million and are already at or near their SALT cap
- Multi-owner professional firms (law firms, medical practices, accounting firms, consulting firms) — these are SSTBs that the House version of the Big Beautiful Bill tried to exclude, but the final law preserved their eligibility
- Founders with significant pass-through income from operating companies or investment partnerships
- Nonresident owners of Washington-source businesses who want to minimize their effective Washington tax rate
The election is less impactful if you are well below the SALT cap and can already deduct your full Washington tax liability on your individual federal return.
Key Dates and Action Items
| Date | Action |
|---|---|
| January 1, 2028 | Washington income tax and PTE election take effect |
| June 15, 2028 | First PTE election deadline (for TY 2028) |
| Late 2027 (expected) | DOR rulemaking on estimated payments and procedures |
What to do now:
Talk to your CPA about modeling the PTE election for your specific entity structure. The benefit depends on your income level, federal bracket, SALT cap utilization, B&O tax exposure, and whether you have nonresident owners. Do not wait until 2028 to start planning — the election is irrevocable once made, and the June 15 deadline comes earlier than most state filing deadlines.
For more on Washington's income tax and planning strategies, see our comprehensive Washington State Taxes guide and our Tax Planning Guide for High Earners.
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
