The State Pass-Through Entity Tax (PTET) for Physician Practices
Key takeaways
- The PTET lets an S corporation or partnership pay state income tax at the entity level, where it is deductible federally without the SALT cap.
- In 2026 the individual SALT cap is $40,400 but falls to $10,000 for modified AGI around $606,000 and above, so the PTET is worth more to high earners.
- Most states with an income tax offer an elective PTET; a few (including Pennsylvania, Delaware, North Dakota and Vermont) do not, and some programs have sunset dates.
- Sole proprietors and single-member LLCs taxed as disregarded entities cannot use it without an S corporation election.
How it works
IRS Notice 2020-75 confirmed that state income taxes imposed on and paid by a partnership or S corporation are deductible by the entity in computing its federal income. States responded by creating elective entity-level taxes. The owners then receive a credit, deduction or exclusion on their state returns, so the state tax is roughly the same while the federal deduction moves from the SALT-capped itemized deduction to the business return.
Why it matters more in 2026
The 2025 tax law raised the SALT cap to $40,400 for 2026, but reduced it by 30% of modified AGI above $505,000, with a $10,000 floor. Most practice-owning physicians are above that level, so their SALT deduction is effectively $10,000. Paying state tax through the PTET restores the deduction. The final law did not restrict PTET deductions.
Illustration
A physician in a 37% federal bracket with $80,000 of state income tax on practice income, limited to a $10,000 SALT deduction, gets no federal benefit from the other $70,000. If the practice pays that $70,000 through the PTET, the federal deduction is worth about $25,900.
Which states offer it
According to the AICPA's state tracker, most states with an income tax have enacted an elective PTET, including California (extended through 2030), New York and New York City, New Jersey, Illinois, Massachusetts, Georgia, Virginia, Maryland, Michigan, Ohio, Arizona and many others. Minnesota's and Oregon's programs are scheduled to run through 2027, and Maine's begins in 2026. Pennsylvania and the District of Columbia have proposals, and Delaware, North Dakota and Vermont have none. States without a wage income tax have no PTET to elect. Check your state page.
Deciding whether to elect
- Election deadlines and estimated payment requirements differ by state, and some require payments during the tax year.
- Nonresident owners may or may not receive a credit in their home state.
- The election lowers the entity's federal income, which can affect QBI (if any), retirement plan calculations based on profit, and basis.
- Multi-owner practices need agreement among owners and a policy for allocating the tax.
Frequently asked questions
Can a sole proprietor physician use the PTET?
Generally no. The election is available to partnerships and S corporations. A sole proprietor or single-member LLC would need to elect S corporation status first.
Is the PTET still allowed after the 2025 tax law?
Yes. The final law kept the federal deduction for entity-level state taxes paid by partnerships and S corporations.
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Sources
This article is for general educational purposes and is not tax, legal or investment advice. Tax law changes often and its application depends on your facts. Figures reflect 2026 rules as published by the sources listed above. Consult a qualified professional before acting. See our editorial policy.