PTET elections and partner compensation: a 2026 guide for professional firms

Partners in high-tax states pay substantial state income tax that they can't fully deduct personally. Pass-through entity tax elections solve much of that problem.

How PTET works

More than 35 states let partnerships and S corporations elect to pay state income tax at the entity level. The entity deducts the tax as a business expense, which reduces the federal income passed through to the owners. Owners receive a state credit or exclusion so they aren't taxed twice. In Notice 2020-75, the IRS said it will allow the entity-level deduction, and taxpayers may rely on that notice.

The individual SALT cap is $40,400 for 2026, but it's reduced by 30% of MAGI above $505,000 and reaches the $10,000 floor at about $606,000 of MAGI, an income level most partners in high-earning firms exceed. For those partners, PTET remains the main workaround, and the 2025 law left it intact. The higher cap is also temporary. It rises 1% a year through 2029 and then drops back to $10,000 in 2030.

Key numbers: individual SALT cap $40,400, reduced above $505,000 MAGI to a $10,000 floor · PTET deduction taken at the entity level.

A worked example

Suppose a four-partner firm in a state with a 9% rate earns $3.2M. By electing PTET, the firm pays and deducts $288,000 of state tax. At federal rates of 35% to 37%, the partners save roughly $100,000 to $106,000 in federal tax, or about $25,000 to $26,600 each, compared with paying the state tax personally once other taxes have used up their $10,000 SALT caps.

Election mechanics to watch

• Elections are annual in most states and have specific deadlines, sometimes during the tax year.
• Payment timing matters, because a cash-method entity deducts PTET in the year it is paid.
• Nonresident partners may need credits in their home states, which don't all honor other states' PTETs.
• Some states require all owners to consent, or limit which types of owners are eligible.

In Connecticut

Connecticut's pass-through entity tax has been elective since 2024. An electing partnership or S corporation pays 6.99%, and each owner who pays Connecticut income tax gets a refundable credit for 87.5% of their share. Owners don't add the PET back, so it also lowers their Connecticut taxable income and recovers part of the uncredited 12.5%. For owners in the 6.99% bracket, the net Connecticut cost is about 5.5% of the tax, and the federal deduction has to exceed that cost. The election is annual and irrevocable. It is made by checking the box on a timely filed Form CT-1065/CT-1120SI, including one filed on extension, and it can't be made on an amended return. A partnership's PET base includes guaranteed payments, while an S corporation owner's salary is outside it. Connecticut residents also receive a credit for their share of a substantially similar entity-level tax paid to another state. The Connecticut guide works through an example.

Partner compensation and its effects

The way partners are paid affects more than cash flow.

S corp owners who take low salaries save payroll tax but limit their retirement contributions, which are based on W-2 pay. For owners funding a cash balance plan, a higher salary may produce more tax savings overall.

Common mistakes

1. Missing a state's election deadline.
2. Not coordinating PTET with partners who live in different states.
3. Setting S corp salaries without considering retirement plan formulas.
4. Keeping compensation formulas in the partnership agreement that don't match the plan's definition of compensation.

How Summer Associates helps

Summer Associates evaluates PTET in every state where your firm files, manages elections and payments, and models partner compensation alongside retirement plans and QBI.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.