2025 Update: State Pass-Through Entity Taxes 

For years, we’ve known that 2025 would be a dynamic year for tax. And so far, it hasn’t disappointed.2025 marks the sunset of federal tax legislation that led to the rise of pass-through entity taxes (PTETs).  Although legislative proposals threatened the efficacy of the PTET deduction for some or all pass-through entities, they did not make it into the final version of the One Big Beautiful Bill Act (OBBBA), which passed on July 4, 2025.  

Let’s explore some of the changes that states have made to their PTETs for tax year 2024 and beyond. 

What is the Pass-Through Entity Tax? 

Typically, pass-through entities—sole proprietorships, partnerships, and S corporations—don’t pay an entity-level income tax. Rather, pass-through profits are taxed on their owners’ individual tax returns. 

However, most states offer PTETs, which allows pass-through entities to pay state income tax at the entity level rather than at the owner level. States implement their pass-through entity taxes differently, but most impose a flat rate ranging from 4% to 8% of taxable income. 

The PTET came to the fore after the Tax Cuts and Jobs Act of 2017 capped state and local tax (SALT) deductions at $10,000 ($5,000 if married filing separately) for individual taxpayers who itemize their deductions for tax years 2018–2025. 

How Does Tax Reform Affect the PTETs in 2025? 

The OBBBA raises the 2025 SALT cap to $40,000 ($20,000 if married filing separately) and increases it by an additional 1% from 2026 through 2029. The SALT cap is slated to fall to $10,000 ($5,000 if married filing separately) permanently starting in 2030. 

Although the new SALT cap is more generous, it also comes with an additional restriction: The cap is reduced by 30% of income that exceeds $500,000 ($250,000 for those married filing separately) in 2025, but the SALT cap cannot be reduced below $10,000. The $500,000 threshold increases by 1% each year. 

Some states wrote their laws to eliminate their PTETs if the federal SALT cap goes away. However, because the SALT cap is here to stay, we can expect most states to continue making their PTETs available to eligible business owners. 

For many taxpayers, the higher SALT cap makes the PTET election a less straightforward decision. For example, if most partners in a partnership won’t exceed their SALT cap in 2025, paying income tax at the entity level may not be necessary or beneficial. A trusted tax advisor can help pass-through entity leaders reassess their PTET elections and make the proper decision for their business. 

State Pass-Through Entity Tax Changes To Know 

Let’s run through some of the most notable recent changes to PTETs around the United States. 

Alabama: PTET Election Can Be Made on Return 

Starting in 2025, Alabama taxpayers can make or revoke their PTET election on their Alabama income tax return, including extensions. In previous years, the election had to be made separately online and by March 15, regardless of the tax return’s due date. 

California: PTET Extended to 2030, Adds Payment Flexibility 

Set to expire after 2025, the California PTET has been extended to 2030. In addition, starting in 2026, California taxpayers are given more flexibility to elect and pay the PTET. 

The California PTET is paid in two installments: The first is due by June 15 of the tax year, and the second is due by the original return due date. The June 15 payment amount is the greater of $1,000 or 50% of the prior year’s tax, with the remainder due by the original return date. Before 2026, the PTET election isn’t valid unless both payments are made — in the proper amounts — by their respective deadlines.  

Starting in 2026 tax years, pass-through entities can still make a PTET election for the year even if they don’t make the June 15 payment (or even if they pay less than the required amount). The revised rule may allow pass-through entity owners the opportunity to make late-breaking PTET elections in years with unpredictable income. 

However, an individual’s California PTET credit amount is reduced when the June 15 payment isn’t made. So, while missing the June 15 payment is permitted, it may limit the PTET’s benefit. 

Georgia: PTET Rate Falls to 5.19% 

The Peach State’s PTET rate is 5.19% for 2025, down from 5.39%. The negligible change is due to two law changes: one passed in July 2024 that aligns the corporate tax and PTET rates to the individual tax rate and a second passed in March 2025 that slashes the rate to 5.19% for 2025, with an additional 0.1% cut each year until it reaches 4.99%.  

Idaho: PTET Rate Goes Down to 5.695%  

Idaho’s PTET rate is pegged to the state’s corporate income tax rate. So, when the corporate income tax rate was changed from 5.8% to 5.695% for 2024, the PTET rate automatically changed, too. 

Indiana: PTET Rate Decreases to 3.05% 

The Hoosier State’s PTET rate is linked to the state’s individual income tax rate. It’s 3.05% for 2024, with plans for it to drop by five-hundredths of a percentage point each year through 2027, when it’ll be at 2.9%. 

Kansas: Tax Credits Can Pass Through, Income Calculation Option Added 

Previously, pass-through entities that made a Kansas PTET election were required to claim income tax credits at the entity level for Kansas state income tax purposes. However, a bill passed in April 2024 allows pass-through entity owners to claim the income tax credits related to the entity’s activities, regardless of whether there is a PTET election in place. 

The same law also allows pass-through entities the choice in how income is computed for resident–owners (and all resident–owners must use the same method): 

• 100% of the pass-through entity’s income, whether sourced to Kansas or another place   

• Only the pass-through entity’s income sourced to Kansas 

Before the law change, only the first option was available. That potentially caused S corporations to make disproportionate distributions among resident–owners and non-resident–owners (S corporations cannot make disproportionate distributions). Adding the second option allows in-state and out-of-state owners to receive equal treatment.  

North Carolina: PTET Rate Drops to 4.5%, Eligibility Expands 

Since 2022, the Tar Heel State’s PTET rate has gone down each year. It falls from 4.5% for 2024 to 4.25% for 2025. The rate will continue its downward slide, dropping to 3.99% for all years after 2025. 

In October 2023, the state’s legislators expanded the availability of the pass-through entity tax election. Previously, the North Carolina PTET election was available only to partnerships whose partners are individuals, certain trusts, estates, certain types of non-profit organizations, partnerships, or S corporations. Session Law 2023-134 added two more types of entities to the list: 

• Trusts whose beneficiaries include only individuals, estates, trusts, and certain types of nonprofit entities. 

• Any entity that is treated as a corporation for federal tax purposes. 

Partnerships that became eligible for the PTET only after this law change are permitted to amend their 2022 returns. 

Michigan: PTET Election Deadline is Extended 

For tax years 2024 and later, pass-through entities have until the end of the ninth month of the following tax year to make a PTET election, thanks to a bill passed into law in January 2025. Before this, companies generally had to make a PTET election by March 15 of the year that the PTET election was to be effective.  

The effect is stark. Absent the law change, calendar-year taxpayers would have until March 15, 2025, to make a PTET election for 2025. Now, calendar-year taxpayers have until September 30, 2026, to make a PTET election for 2025. 

Oklahoma: PTET Election Deadline is Extended 

Like Michigan, Oklahoma’s legislature also passed a law to extend the PTET election deadline. Now, an Oklahoma PTET election is due on the same date as that year’s tax return, including extensions, simply by filing the PTET tax return. Previously, the PTET election was made on Form 586 within 2 ½ months of the beginning of the tax year, and it was effective until revoked by filing another Form 586 and checking a specific box. The revocation requirement no longer applies. 

Utah: PTET Rate is Lowered to 4.55% 

Like Georgia and Idaho, Utah also lowered its PTET rate for 2024 and beyond. Utah’s PTET rate is linked to its individual income tax rate, which was changed from 4.65% to 4.55% for 2024 and then lowered further to 4.50% for 2025. 

Smith + Howard: PTET and State Income Tax Experts 

PTETs can get complex — fast. Each state has its own eligibility requirement and process for making the election. Plus, it’s not always a given that electing the PTET is the best option. It may make sense to elect the PTET in one state but not another. A higher SALT cap may also change the calculus for many taxpayers. 

Smith + Howard tax advisors are adept at assessing the benefits and risks of making a PTET election, including their effect on both the business and its owners. To learn more about Smith + Howard’s tax services, contact an advisor.