What is a PTET election and should our practice consider one?

A pass-through entity tax (PTET) election lets your practice pay state income tax on the owners’ share of profit at the entity level instead of on each owner’s personal return. It’s available to partnerships and S-corps in most states with an income tax, including Kansas and Missouri. Because the practice pays the tax, it counts as a business expense on the federal return. Each owner then gets a credit or an income exclusion on their state return, so the same income isn’t taxed twice.

This matters because of the federal cap on deducting state and local taxes. For 2026 the cap is $40,400, but it shrinks by 30% of modified AGI above $505,000. At about $606,000 of MAGI it’s back down to $10,000. Most physician owners are in or above that range, and property taxes on a home can use up most of $10,000 by themselves. Without PTET, nearly all of the state income tax you pay does nothing for you on your federal return.

Here is a rough example. An S-corp owner with $700,000 of pass-through income in a state with a 5% rate owes around $35,000 in state tax on that income. Paid personally, almost none of it is deductible. Paid through a PTET election, the full amount reduces federal taxable income. In the 37% bracket that’s close to $13,000 in federal savings each year, and the savings add up quickly in a group practice with several owners.

PTET is a strong fit for S-corp and partnership practices whose owners earn well above $500,000. It doesn’t help sole proprietors or single-member LLCs taxed as sole proprietors, which is one more reason the S-corp question comes up so often in tax services for physicians. C-corp practices already deduct state tax at the entity level. Owners in states without an income tax, like Texas or Florida, have nothing to gain.

There are limits worth knowing. PTET generally applies to profit that flows through on the K-1, not to the W-2 salary an S-corp owner pays themselves. State tax withheld from that salary still falls under the personal cap, which is one factor to weigh when setting reasonable compensation.

The mechanics vary by state. Some states require the election early in the tax year, while others let you make it on the return. Some require quarterly estimated payments from the entity. To deduct the tax for a given year, the practice generally needs to pay it by December 31. Group practices should check whether every owner has to participate and how owners who live in a different state from the practice are treated, since their home state may not give full credit for PTET paid elsewhere. Owners also need to lower their personal estimated payments so they aren’t paying the same tax twice.

The cap is scheduled to drop back to $10,000 for everyone in 2030. For most practice owners that change won’t matter much because the phase-out already puts them at $10,000. PTET stays useful either way.

If your practice is an S-corp or partnership and the owners are high earners, it’s worth running the numbers before your state’s election deadline. We handle this as part of tax planning for practice owners. Our enrolled agents estimate the savings, confirm your state’s rules and deadlines, schedule the entity payments, and adjust personal estimates so everything lines up at filing time.