The federal limit on state and local tax deductions, known as the SALT cap, is set to expire for tax years after 2025, raising state tax uncertainty for pass-through entities that have elected to be taxed at the entity level. Although most states’ pass-through entity taxes (PTETs) will remain in effect if the federal election expires, six states (including Illinois) tie their PTET to the duration of the SALT cap, and four states (including California) limit the PTET election to tax years before 2026. Even in states that offer the PTET election indefinitely, the potential elimination of the federal SALT cap may prompt pass-through entities that elected to pay state taxes at the entity level to reevaluate the benefits of making the election. In this article, Checkpoint Catalyst considers the questions posed for pass-through entities, and the future of the PTET.
The rise of the PTET.
Six years ago, the Tax Cuts and Jobs Act,1 imposed a $10,000 limit ($5,000 for married filing separately) on the state and local tax deduction allowed to individual taxpayers in calculating their federal taxable income.2 The $10,000 limitation applies to tax years beginning on or after January 1, 2018, but before January 1, 2026, and thus is set to expire for tax years after 2025.3 The expiration of the federal limitation may have state tax implications for pass-through entities that elected to pay state income tax at the entity level.
As background, the federal limitation does not apply to corporate taxpayers.4Before the TCJA, both individual taxpayers that itemized their deductions, and corporate taxpayers, could deduct 100% of state and local taxes paid or accrued during the tax year.5After the SALT cap, individual taxpayers — including owners of pass-through entities — saw their allowed deductions greatly reduced. In order to circumvent this result, 36 states and one locality (New York City) enacted elective pass-through entity-level taxes that impose the tax at the entity level and shift the deduction for the pass-through entity’s state tax expense from the individual owners of the pass-through entity to the entity itself, thereby creating a state tax expense and deduction at the pass-through entity level which is not subject to the $10,000 cap. With the potential elimination of the federal SALT cap, pass-through entities that elected to pay state taxes at the entity level will need to consider whether this option would continue to be available under the law of the relevant state, and if so whether the pass-through entity election continues to afford the most beneficial state tax outcome and what steps would need to be taken if the election is no longer desired.
Expiring PTET Provisions.
In most states, the elective pass-through entity tax (PTET) provisions are effective indefinitely, but several states (Colorado, Iowa, Massachusetts, Michigan, Minnesota, and Oregon) limit the election to the tax years in which the federal SALT deduction is limited by IRC 164 — meaning that if the SALT cap expires on January 1, 2026, the state election is also no longer available for tax years beginning on or after January 1, 2026.6 Four other states’ laws (California, Illinois, Utah, and Virginia), similar to the federal provisions, provide that the PTET election is only available in tax years before January 1, 2026; thus, for these states, the state legislature would need to act to extend the provisions.7
For states with PTET provisions that are effective indefinitely, taxpayers will need to evaluate whether the election is still reasonable if the federal limitation no longer applies. For these states, taxpayers will need to consider the election procedures. In most states the election is made on an annual basis and cannot be revoked for that tax year once made; however, in three states (Louisiana, Oklahoma, and Mississippi) a PTET election is effective for the current and successive years until it is revoked or terminated.8 (In Michigan the election is binding for the year it is made and two successive years; however, the Michigan PTET is repealed if the SALT cap no longer applies) 9
Election revocation.
In the states that require an affirmative revocation, there may be specific procedures and deadlines for terminating the election. For example, in Louisiana, taxpayers can automatically terminate the election but only if the entity has the approval of at least 50% of the ownership interest of the entity and provided the application for termination is submitted to the Department of Revenue, together with all required documentation, no later than November 1 prior to the close of the calendar year, or 60 days prior to the close of a fiscal year filer’s tax year. The PTE election termination is effective for the next tax year and prohibits the PTE or its successor from making another PTET election for the next five tax years. 10 In Mississippi, a pass-through entity can revoke an election by submitting the appropriate form at any time during a subsequent tax year for which the entity wants to no longer be taxed as an electing pass-through entity, or by the due date of the return for that tax year, or the date the return is filed, whichever is latest.11However, the revocation of an election must be effectuated via a vote that satisfies the threshold required for taking official action specified in the entity’s governing documents.12 If relevant provisions are not contained in the governing documents, an election must be effectuated either by vote or written consent of the owners, members, partners or shareholders holding greater than 50% of the voting control of the entity, and if the entity has a governing body, by vote or written consent of the members of the governing body. 13
In Oklahoma, a revocation is effective on the first day of the pass-through entity’s tax year, provided it is made within two months and 15 days of the beginning of the tax year. Revocations made after two months and 15 days are effective the first day of the following tax year.14
The takeaway.
Pass-through entities that have elected to be subject to an individual state’s PTET should investigate the availability and duration of the election amid a potential expiration of the SALT cap. Even in states where the election continues to be available, an entity may determine that the elimination of the SALT cap reduces or eliminates the benefits of the PTET election.
Checkpoint resources.
Checkpoint Catalyst Topic #1014, “SALT Cap Workaround”—Pass-Through Entity-Level Tax enables customers to quickly navigate the information they need to make informed decisions on the state tax advantages and disadvantages of electing to be taxed at the entity level. The topic serves as a comprehensive advisory shortcut, providing an overview and analysis of each state’s laws, regulations, and official guidance on the elective pass-through entity-level taxes across the states. An overview of considerations for pass-through entities is also available in our prior article in this series: Burns, Byrd, and Ford, “Multistate Trends: What Pass-Throughs Need to Know About the Entity-Level Election,” Checkpoint State Tax Update, 02/13/2024.
For charts with clickable maps reflecting availability of the pass-through entity-level tax across the states, see the following Checkpoint State Charts, both of which can be previewed by Checkpoint Catalyst subscribers in text-only format in the Introduction to Checkpoint Catalyst Topic #1014, “SALT Cap Workaround”—Pass-Through Entity-Level Tax: State Imposes Entity Level Income Tax— Partnerships, and State Imposes Entity Level Income Tax S—Corporations.
For a detailed analysis of other state taxes that may apply to pass-through entities, and the reporting responsibilities of pass-through entities across the states, see the multistate components of our federal partnership and S corporation topics:
- Checkpoint Catalyst Topic #216:1000, State Treatment of Entity Classification/Disregarded Entities; and
- Catalyst Topic 253:1000, State Taxation of S Corporation Income, Losses, Deductions, and Credits.
1 TCJA, P.L. 115-97, 12/22/2017.
6 Colo. Rev. Stat. § 39-22-343(2); Iowa Code 422.16C(2); Mass. Gen. L. § 3 Application of chapter 63D.; Mich. Comp. Laws Ann. § 206.847; Minn. Stat. 289A.08, Subd. 7a(b); L. 2021 Chapter 589 § 3(1), amended by L. 2023 Chapter 399 § 1; L. 2021, c. 589, sec. 13; Or. Admin. R. § 150-314-0522.
7 Cal. Rev. & Tax. Cd. § 19900(a)(1); ILCS Ch. 35 § 5/201(p); Utah Code Ann. 59-10-1403.2(2)(a); and Va. Code Ann. 58.1-390.3(A).
8 La. Rev. Stat. Ann. § 47:287.732.2(A)(3); Okla. Stat. Title 68 § 2355.1P-4(H); Miss. Code Ann. § 27-7-26(1)(b).
10 La. Rev. Stat. Ann. § 47:287.732.2(A)(4)(c); La. Admin. Code § 61:I.1001(D)(2), La. Admin. Code § 61:I.1001(D)(3); Louisiana Revenue Information Bulletin No. 23-022, 10/27/2023
11 Miss. Code Ann. § 27-7-26(1)(b); Updated Electing Pass-Through Entity FAQs, 03/04/2024; Notice 80-23-002: Updated Guidance on Pass-Through Entity Election, 04/13/2023.
12 Miss. Code Ann. § 27-7-26(1)(b); Updated Electing Pass-Through Entity FAQs, 03/04/2024; Notice 80-23-002: Updated Guidance on Pass-Through Entity Election, 04/13/2023.
13 Miss. Code Ann. § 27-7-26(1)(b); Updated Electing Pass-Through Entity FAQs, 03/04/2024; Notice 80-23-002: Updated Guidance on Pass-Through Entity Election, 04/13/2023.
14 Okla. Stat. Title 68 § 2355.1P-4(H).
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