Published Aug. 08, 2025 01:24AM EDT
Avoiding the SALT Cap through PTE Credits and Exclusions
If you receive a K-1 as an owner or part-owner of a partnership, LLC, or S Corp, a recent development on your taxes has been the inclusion on your state forms indicating PTE credits or exclusions. This is part of a workaround to the $10,000 limit on the SALT deduction imposed by the Tax Cuts and Jobs Act of 2017. This article will briefly explain how this works and what to look out for in preparing your tax returns so you can take advantage of the tax avoidance.
The Concept
States have sought to enable their residents to avoid the cap primarily by having the entities pay state taxes at the entity level. So this only applies to owners of passthrough entities, like partnerships, LLCs, and S Corporations. Paying taxes at the entity level is the opposite of the ordinary structure of a passthrough entity. As the name suggests, typically these entities pass their income through to their owners. Governments (federal and state) then tax the owners for the income. The entities’ return is thus primarily informational, telling revenue authorities what income it is passing along so those authorities can ensure it is taxed at the owner level.
The Tax Cuts and Jobs Acts of 2017, however, imposes a limit on the amount of state income taxes individuals—those owners to which income is passed—can deduct from their income taxes. It does not, however, impose a cap on entities’ deduction of state income taxes. States have thus shifted their approach to allow passthrough entities to elect to pay taxes at the entity level. The IRS provided the green light, at least for the immediate future, to this approach in 2020. Almost every state has implemented this system since, with only four (DC, DE, ME, and ND) not doing so although they do impose owner-level taxes. (Nine states do not have owner-level tax—AK, FL, NH, NV, SD, TN, TX, WA, and WY—such that they have not had to navigate this.)
What Individual Taxpayers Should Look Out For
Does the State Form Indicate Entity-Level Taxes? If you receive a K-1, or operate an entity that owns passthrough entities, the main rule for this is to not ignore the state K-1 form. It is often attached to the federal K-1 but is easy to overlook because it is largely duplicative with the federal form. The state K-1 equivalent, however, reports the tax information for the passthrough entity. Importantly, it is only on the state form that you will be able to determine if it has elected to pay taxes at the entity level.
Avoid Double Taxation! Finding this is important primarily because it will help you avoid double taxation. This risk exists because, with taxes being paid at the entity level but the income still being reported on the K-1, some taxpayers inadvertently pay state taxes on the reported income twice. Thus, they are paying once at the entity level and then again at the owner level. States vary in their approach on how to avoid this. Most will allow the owners to take a credit for taxes paid at the entity level on their behalf. Others, however, direct the owners to exclude the income on their state return. It is very state specific and usually requires consulting the instructions for the relevant state form or forms.
Making the Election. One final element to look out for is at the time of election. If you do not manage your entity’s tax return, they may ask if you want to participate in a composite return. Usually the answer is yes, but there are instances where you should not. For example, states like California do not allow partners to participate in such returns if they have other income generated in the state.
Taking advantage of this work around requires familiarity with the concept and comfort with navigating tax instructions and forms. Mid-Atlantic Law & Tax is happy to prepare these returns for you but, even if you do not work with us, please consult with your tax attorney or tax preparer so they can assess your specific situation.
