Pass-through entity tax elections are often described as a workaround to the federal SALT limitation, but that framing understates their continuing planning value. While the SALT cap was the catalyst for widespread adoption, the relevance of PTE elections today lies in execution, statutory design differences across states, and the distinction between entity-level deductions and individual itemized deductions.
When applied correctly, PTE elections continue to restore deductions that would otherwise be limited or lost
The increase in the federal SALT itemized deduction cap to up to $40,000 for 2025 under the One Big Beautiful Bill Act (with phaseouts at higher income levels) reduced, but did not eliminate, the value of PTE elections. When applied correctly, PTE elections continue to restore deductions that would otherwise be limited or lost and require coordinated CPA judgment to produce reliable results.
This article uses Arizona[1] as a primary planning example and contrasts it with New Jersey[2] to illustrate how materially different state frameworks affect outcomes. Although PTE elections are no longer new, they remain widely misunderstood, particularly in multi-state and tiered ownership structures. While the statutory framework may appear straightforward, the practical tax consequences often require extensive analysis.
Entity-Level Deduction Versus Individual SALT Deduction
At a technical level, a PTE election shifts state income tax from the individual return to the entity return. Under IRS Notice 2020-75, specified state and local income tax payments made by a partnership or S corporation are generally deductible in computing non separately stated income or loss and are not subject to the individual SALT itemized deduction limitation.[3] That deduction reduces the pass-through income reported to the owners, bypassing the individual SALT cap.
State taxes paid personally by the owner may be deductible only to the extent that they meet three conditions: they fall within the federal SALT cap, they are not reduced by applicable phaseouts, and the taxpayer has itemized deductions.[4] For 2025, the federal SALT cap increased from $10,000 to up to $40,000, subject to income-based phaseouts for higher-income taxpayers.
At the same time, the standard deduction for 2025 is high enough that many taxpayers will still not itemize even with a larger SALT cap. For those taxpayers, paying state income tax at the entity level can create a federal tax benefit that would not exist if the same tax were paid personally, because the entity-level deduction reduces taxable income “above the line” while the owner still claims the standard deduction on the individual return.
This distinction matters most for taxpayers with significant property taxes, multi-state income, or itemized deductions that hover around the standard deduction threshold. The SALT cap applies in aggregate to state and local income (or sales) taxes and property taxes paid personally; it does not apply to taxes paid by a business entity.
Illustrative Example Under the 2025 SALT Cap
Assume an Arizona resident owns an S corporation that elects into Arizona’s PTE regime and pays $20,000 of Arizona income tax at the entity level. The same taxpayer also pays $8,000 of Arizona property taxes and $7,000 of additional state income taxes personally, for a total of $15,000 of personal SALT.
For federal purposes in 2025, the $20,000 PTE tax paid by the entity is fully deductible on the S corporation return and reduces federal taxable income without regard to the SALT cap. At the individual level, the taxpayer compares:
• Itemizing: $15,000 of personal SALT plus other itemized deductions.
• Standard deduction: the applicable standard deduction amount (for example, for a married couple, the figure will often significantly exceed $15,000 of SALT plus modest additional deductions).
If the taxpayer’s other itemized deductions are modest, their total itemized deductions may still fall below the standard deduction, so they choose the standard deduction. In that case, the $15,000 of personal SALT produces no incremental benefit on Schedule A, but the $20,000 PTE tax still reduces pass-through income in full, creating a federal benefit that would not exist if all state taxes were paid personally.
Even for taxpayers whose itemized deductions exceed the standard deduction, a PTE election can matter when property taxes, multi-state income taxes, or other SALT push them toward or above the $40,000 cap. In those situations, shifting part of the state tax burden to the entity can preserve federal benefit for amounts that would otherwise be limited or lost on Schedule A.
For simplicity, this example assumes the taxpayer is below the MAGI threshold where the One Big Beautiful Bill Act begins to phase out the SALT benefit[5]; actual results for higher-income taxpayers will vary as phaseouts apply.
Why PTE Elections Still Matter in Arizona
For taxable year 2025, Arizona’s PTE income tax is assessed at 2.50% of income attributable to resident owners, and 2.50% of Arizona-source income for nonresidents. A profitable S corporation with $500,000 of Arizona taxable income would pay $12,500 of PTE tax at the entity level. For an owner in the 35% federal bracket, that deduction produces approximately $4,375 in federal tax savings; at the 37% bracket, the savings increase to approximately $4,625, subject to interaction with other federal rules such as OBBBA phaseouts and QBI.
These results are meaningful, but they are not automatic. Arizona now allows the PTE election to be made on an original or amended return; recent legislation removed the prior requirement that the election be made only on a timely filed original return.[6] However, estimated payment rules, credit carryforwards, and coordination with individual estimated taxes still require careful execution to avoid penalties and timing mismatches.
Arizona does not impose a minimum percentage of resident ownership for an entity to make a PTE election; resident and nonresident individual owners, estates, and trusts may participate, subject to opt-out rights. This differs materially from several other states that impose residency, ownership, or filing thresholds that can limit access to their PTE regimes.
Tiered Partnerships and Structural Limitations
One of the most significant limitations of Arizona’s PTE regime is its treatment of tiered ownership. Arizona allows only individuals, estates, and trusts to be eligible participants in the PTE election; partnerships, S corporations, and other entities are not eligible participants and cannot claim the credit.[7] As a result, a lower-tier partnership or S corporation may not pass a usable Arizona PTE credit through to an upper-tier entity owner.
This restriction materially affects planning for private equity structures, real estate funds, and multi-entity operating groups. In these cases, a PTE election at the lower tier may provide no practical benefit if the ownership chain includes ineligible entities that cannot claim the credit. Because Arizona does not allow the PTE credit to be claimed by entity owners, any portion of the credit allocated to ineligible upper-tier entities is effectively stranded.
CPA analysis must therefore include not only income levels and tax rates, but also ownership structure. A technically valid election can still be economically ineffective if credits cannot reach the ultimate taxpayer who can actually use them.
Comparative Analysis: Arizona Versus New Jersey
New Jersey’s Pass-Through Business Alternative Income Tax (BAIT) operates under a materially different framework. New Jersey allows combined or aggregated BAIT filings and accommodates certain tiered and commonly owned entity structures, enabling the PTE credit to flow through more complex ownership chains when statutory ownership thresholds are met.
New Jersey also imposes different residency and filing considerations and generally requires the BAIT election to be made by the original due date of the return for that tax year. Late elections are generally not permitted, absent specific administrative relief. These procedural differences create materially different risk profiles and planning timelines compared to Arizona, where an amended-return election can sometimes rescue a missed opportunity.
The comparison highlights a broader point: PTE elections are not uniform. States may offer elections that appear similar in concept but diverge significantly in execution, eligibility, and credit utilization, especially in multi-state and multi-tier structures.
The Role of CPA Judgment
The value of a PTE election does not lie in explaining the statute. It lies in applying it with precision. Timing of payments, coordination with estimated taxes, evaluation of ownership structure, and analysis of itemized versus standard deduction outcomes all determine whether the election produces real savings.
Post-OBBBA, this analysis must also consider SALT cap phaseouts, QBI interactions, AMT exposure, and the impact on other federal and state tax attributes. The 2025 SALT cap increase did not eliminate the need for this analysis; it raised the bar. Taxpayers who assume that the higher cap makes PTE elections irrelevant are at risk of leaving deductions on the table or making elections that no longer align with their broader tax posture.
In a post-OBBBA environment, the difference between a PTE election that works and one that disappoints is rarely the statute. It is the CPA.
Cite “Why do Pass Through Elections Still Matter and Why are CPAs Central to Making Them Work?” DOI: https://doi.org/10.67283/CPAPub-AFC8682A
[1] Arizona Department of Revenue, The Arizona Pass-Through Entity Election, Pub 713, Revised: Nov 2025. Available: https://azdor.gov/sites/default/files/2023-03/PUBLICATION_713.pdf retrieved June 15, 2026
[2] 2025 PTE-100 1 Pass-Through Business Alternative Income Tax Return Instructions, Available: https://www.nj.gov/treasury/taxation/pdf/current/pte-bait/pte100instr.pdf, retrieved June 15, 2026
