What is PTET and how does it work?

PTET allows S-corps and partnerships to pay state income tax at the entity level instead of the individual level. The entity gets a federal business deduction bypassing the $10,000 SALT cap, and owners receive a state tax credit. Over 35 states offer this.

Does PTET reduce the QBI deduction?

Yes. PTET reduces qualified business income, which reduces your §199A deduction by 20 cents per dollar of PTET. For a $50,000 PTET payment, QBI deduction drops ~$10,000. You still come out ahead — net benefit is typically 60-70% of headline SALT savings.

PTET / SALT Cap Workaround for Contractors: How to Deduct State Taxes Again

Since 2018, the SALT deduction has been capped at $10,000. If you're a California contractor making $500K, your state tax bill is roughly $55,000 — but you can only deduct $10,000 federally. That's $45,000 in lost deductions every year.

PTET (Pass-Through Entity Tax) is the IRS-approved workaround. It moves the state tax payment from your personal return to the entity level, where the $10K cap doesn't apply. Over 35 states offer this. If you're a California S-Corp owner and haven't elected, you're leaving real money on the table.

How PTET Works

Without PTET: S-Corp earns income → passes to your return → you pay California tax personally → deduct max $10K federally.

With PTET: S-Corp earns income → S-Corp pays California tax directly as a business expense (no $10K cap) → you get a credit on your personal California return (no double tax).

The Numbers for California Contractors

HVAC contractor, S-Corp, $400K pass-through income:

Without PTET: California tax ~$36,000. Federal SALT deduction capped at $10K. Lost deduction: $26K. Federal cost at 35%: $9,100/year lost.

With PTET: S-Corp pays $36K PTET. Full $36K federal deduction. Personal CA credit offsets. Federal savings: $9,100/year.

The QBI Interaction — Don't Skip This

PTET reduces your Qualified Business Income (QBI), which reduces your §199A deduction. In our example: $36K PTET reduces QBI by $36K. At 20%, that's a $7,200 QBI reduction. Real cost: $7,200 × 35% = $2,520.

Net benefit: $9,100 - $2,520 = $6,580/year in real savings. Still very worth it. But model the net, not the headline.

The Election Deadline

California's PTET election is made on the entity's timely-filed return. First estimated payment (at least 50%) is due June 15. This is an annual election — every year you need to opt in, calculate, and pay on time.

If your CPA doesn't raise this in Q1, ask. Or have a fractional CFO build it into the annual tax calendar.

Who Shouldn't Elect

Skip PTET if: total state taxes are under $10K anyway, you're in a zero-tax state, QBI offset eliminates the benefit at lower income, or the June 15 estimated payment strains seasonal cash flow.

For most California contractors doing $3M–$8M, the math heavily favors electing. It's not aggressive — it's a state-created mechanism designed for pass-through entity parity. This stacks with your S-Corp, accountable plan, and broader tax strategy.