Business-Owning Couple Saves $23K Using PTET to Bypass SALT Cap

The Problem

This couple operated an architectural design firm through an S-Corp generating $920,000 in revenue with $380,000 in net S-Corp income flowing through to their personal return. Combined with the spouse's $145,000 W-2 income from a university position, total household income was $525,000. Living in New York, they paid approximately $47,000 in state and local income taxes. However, the TCJA's $10,000 SALT deduction cap (IRC §164(b)(6)) limited their itemized deduction for state and local taxes to just $10,000, effectively making $37,000 in state taxes non-deductible.

The couple's prior CPA had accepted the SALT cap as an unavoidable cost of living in a high-tax state. The CPA was unaware that New York had enacted a Pass-Through Entity Tax (PTET) election effective for tax years beginning in 2021, which allows qualifying pass-through entities (S-Corps and partnerships) to elect to pay state income tax at the entity level. Because entity-level taxes are deductible as a business expense under IRC §162, they bypass the $10,000 SALT cap entirely. Over 30 states now offer some form of PTET workaround.

AE Tax Strategy

1. PTET Election Under New York Tax Law §862

We filed the PTET election for the S-Corp with the New York Department of Taxation. The S-Corp paid $32,400 in New York PTET on the $380,000 of pass-through income (at the graduated PTET rates of 6.85% to 10.90%). This entity-level tax payment was deductible on the S-Corp's federal Form 1120-S as a state tax expense under IRC §164(a)(3), reducing the taxable income flowing through to the couple's personal return. The couple then received a dollar-for-dollar credit on their New York personal return for the PTET paid, avoiding double state taxation.

2. Federal Tax Benefit Calculation

By deducting the $32,400 PTET payment at the entity level, the S-Corp's federal taxable pass-through income decreased from $380,000 to $347,600. At the couple's 32% federal marginal rate, this produced a federal tax savings of $10,368. Additionally, the couple's personal SALT deduction was no longer consumed by the S-Corp income taxes (those were paid at the entity level), freeing up capacity under the $10,000 SALT cap for property taxes and the spouse's state tax withholding. The net effect was approximately $23,000 in combined federal and state tax savings after all adjustments.

3. Ongoing PTET Optimization and Estimated Payment Coordination

We coordinated the S-Corp's PTET estimated payments with the couple's personal estimated payments to avoid underpayment penalties at both the entity and individual levels. The PTET election must be made annually by the entity's filing deadline (March 15 for S-Corps), and estimated payments are due quarterly. We also modeled the interaction between the PTET and the QBI deduction under IRC §199A, confirming that the PTET payment reduced QBI dollar-for-dollar but the net benefit was still significantly positive because the federal tax rate savings exceeded the QBI deduction reduction.

Before & After Comparison

Tax Category	Before	After	Savings
SALT Deduction (Without PTET)	$10,000	$10,000	$0
PTET Entity-Level Deduction	$0	$32,400	$32,400
Federal Tax Savings	$0	$10,368	$10,368
Net State/Federal Benefit	$0	$23,000	$23,000
Total	$10,000	$42,400	$23,000

Key Takeaways

• The PTET election is the most effective workaround for the $10K SALT cap for business owners in high-tax states — over 30 states now offer some version of this election.
• PTET payments reduce QBI for Section 199A purposes, so the net benefit must be modeled against the QBI deduction loss to confirm the election is beneficial.
• The PTET election must be made annually and cannot be revoked once made for a given tax year — modeling the full tax impact before electing is essential.
• W-2 income from non-business sources (the spouse's university salary) does not benefit from the PTET and remains subject to the SALT cap — the benefit is limited to pass-through business income.