Key Takeaways
- Many law firms are structured as S corporations, partnerships, or multi-member LLCs. If your firm operates under one of these pass-through entities in a high-tax state, the PTET election may allow the business to deduct state income taxes that would otherwise be limited on your personal return.
- The IRS confirmed in Notice 2020-75 that PTET elections are a legitimate strategy and not an abusive shelter, so you can act with legal confidence.
- More than 36 states plus Washington D.C. have passed PTET legislation as of 2025, making this benefit accessible to most pass-through business owners in high-tax states right now.
- Getting the election right means clean, accurate finances at every step. That is exactly what the virtual legal bookkeepers at Bookkeeper.law are built to support.
What Is the SALT Deduction Cap?
Before 2018, you could deduct everything you paid in state and local taxes on your federal return. Income taxes, property taxes, all of it. Then the Tax Cuts and Jobs Act (TCJA) of 2017 capped that deduction at $10,000 per year for individuals ($5,000 for married filing separately).
For most W-2 workers in low-tax states, that change was barely noticeable. But if you own a law firm or any pass-through business in California, New York, New Jersey, or Illinois, you felt it immediately.
Picture this: you are a partner in a New York City law firm. Your share of business income is $500,000. Your state and local tax bill lands somewhere around $55,000. Under the old rules, you could deduct that entire amount against your federal income. Under the TCJA cap, you can only deduct $10,000. The remaining $45,000 gets taxed twice with no relief.
The numbers behind the impact are significant:
- The Tax Policy Center found that roughly 11 million taxpayers lost some or all of their SALT deduction after 2017.
- Average SALT deductions in Connecticut and New York were already exceeding $20,000 before the cap, double what the new limit allows.
- The NFIB reported that pass-through business owners, because they report business income on personal returns, absorbed a disproportionately large share of the new tax burden.
What Is the SALT Cap Workaround?
The SALT cap workaround is a tax strategy that allows eligible businesses to deduct state income taxes at the business level instead of on the owner's personal tax return. It is commonly called the Pass-Through Entity Tax (PTET) election.
What Is PTET?
PTET stands for Pass-Through Entity Tax. It lets certain businesses, including many law firms, pay state income tax directly from the business. In return, the business may deduct that tax as a business expense on its federal return.
How Does the SALT Cap Workaround Work?
The federal SALT deduction is capped at $10,000 per year for individuals. By electing PTET, the tax is paid by the business rather than the owner personally. This can allow law firm owners to deduct more state income tax than they otherwise could on their personal returns.
Here is a side-by-side look at the difference:
Before making the PTET election, it helps to see what changes from a tax perspective. The key difference is where the state income tax is paid and where the deduction is taken. For many law firms, this shift can preserve deductions that would otherwise be limited by the federal $10,000 SALT cap.
On the state side, you still come out even. Owners receive a credit on their personal state return for the state tax the entity paid on their behalf. In most states, that credit offsets your personal state liability dollar-for-dollar, so you are not paying state tax twice.
Who Can Actually Benefit From It?
This is the question most articles avoid. Here is a direct answer.
You Are Likely a Good Candidate for PTET if Your Law Firm:
- Is structured as an S corporation, partnership, or multi-member LLC in a state that has enacted PTET legislation.
- Pays more than $10,000 per year in state income taxes at the owner level.
- Has owners who are individuals rather than corporations (some states limit eligibility based on ownership structure).
- Operates primarily in states with a personal income tax.
- Maintains clean, accurate financial records so the election and related payments can be tracked correctly.
For many law firms, especially those with strong profits in high-tax states, PTET can produce meaningful federal tax savings when implemented correctly with guidance from a qualified CPA.
You are probably not a candidate if:
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- Your business is a C corporation, since C corps already pay entity-level tax and their shareholders are not subject to the individual SALT cap
- You operate only in states with no income tax, like Texas or Florida, where there is no state tax burden to shift to the entity level
- Your state has not yet passed PTET legislation
- You are a single-member LLC, since most states require at least two owners (though New York and a few others do allow single-member participation under specific conditions)
For law firm owners specifically, most small and mid-size practices are structured as partnerships, professional LLCs, or S corporations. That means a large portion of law firm owners are well-positioned to benefit, provided their state has PTET legislation in place.
How Does the IRS View This Strategy?
The IRS gave this strategy its explicit approval. In IRS Notice 2020-75, published November 9, 2020, the agency announced it would issue regulations allowing partnerships and S corporations to deduct entity-level state and local income taxes as business expenses. The notice also made clear that the agency does not consider these elections to be improper tax shelters.
Before this notice, some tax practitioners were hesitant to recommend the strategy because the IRS had not officially weighed in. After November 2020, that hesitation largely disappeared.
The key points from Notice 2020-75 are worth knowing:
- The entity can deduct PTET payments in the year they are paid, not just accrued
- That deduction is not subject to the individual $10,000 SALT cap
- S corporations are explicitly included alongside partnerships
- The notice applies even if the individual owner could not have deducted the full amount personally
One important note: Notice 2020-75 is not a finalized regulation. It is the IRS's stated position, and it signals where final rules will land. No contrary guidance has been issued since publication. For practical purposes, this is about as solid a legal footing as you can have for a planning strategy that has not yet gone through full rulemaking.
Which States Have Enacted PTET Legislation?
As of early 2025, 36 states plus Washington D.C. have passed some form of PTET legislation (Tax Foundation, 2025). Adoption has accelerated steadily since New York and California joined in 2021.
Here is how the major states compare:
States with no personal income tax (Texas, Florida, Nevada, Wyoming, South Dakota, Alaska, and Washington) do not offer PTET elections because there is no state tax burden to shift. If your business operates in multiple states, you need to analyze the election separately for each one. Rates, credit structures, eligibility rules, and deadlines all vary by jurisdiction.
How Does a PTE Election Work, Step by Step?
Understanding the process keeps you from making costly mistakes, especially around deadlines. Here is how a typical PTET election flows from start to finish.
Step 1: Confirm eligibility
Verify your entity type qualifies in each relevant state and that your ownership structure meets that state's requirements. Some states require unanimous owner consent. Others only need majority agreement.
Step 2: Make the election
File the state's election form before the applicable deadline. Some states require this by the original due date of the entity return. Others allow the extended due date. Missing this deadline cannot be corrected retroactively.
Step 3: Calculate the PTET liability
Compute the entity-level state tax using the income apportioned or allocated to that state, applying the state's specific rate and formula.
Step 4: Pay quarterly estimates
Most states require quarterly PTET estimated payments. Standard underpayment penalties apply if you miss or underpay them.
Step 5: File the entity PTET return
Report the entity-level tax paid on the state's dedicated pass-through entity tax return.
Step 6: Issue K-1s with credit information
Each owner's Schedule K-1 must reflect the PTET paid on their behalf. Without this, owners cannot claim the corresponding state credit on their personal returns.
Step 7: Owners claim the state credit
Each owner uses the credit to offset their personal state tax liability, so they are not paying state tax twice.
The federal result: the entity deducts the PTET payment as a business expense, reducing each owner's federal taxable income with no dollar ceiling.
Key Risks You Need to Know Before You Elect
The PTET strategy is IRS-approved and widely used. That does not mean it is without risk. Here are the ones that matter most.
Legislative risk. The TCJA SALT cap expires after 2025. If Congress removes or substantially raises the cap, the PTET workaround loses most of its federal benefit. Planning should account for that possibility.
State law changes. Several states have already modified their PTET rules after the initial rollout. California has changed election deadlines and computation methods more than once. You cannot treat this as a set-and-forget election.
Owner-level complications. If a state's PTET credit is not fully refundable, owners who do not have enough personal state tax liability may not capture the full benefit. Non-resident owners often face additional hurdles because their home states may not recognize the credit from another state.
Cash flow timing. The entity pays state tax upfront on behalf of owners, sometimes well before the federal savings show up. For firms with tight cash flow, this timing gap requires careful planning.
Multi-state coordination. If your business operates in multiple states, you are managing separate elections with different rules, deadlines, and credit mechanics in each jurisdiction. A missed deadline in one state means that year's federal benefit is gone for that state.
Documentation. Properly documented elections made consistent with Notice 2020-75 carry strong audit protection. Aggressive implementations in tiered partnership structures, or elections without thorough records of the payment and credit allocation, carry meaningfully more risk.
Why Accurate Bookkeeping Is the Foundation of Every PTET Election
Here is something most SALT cap articles skip entirely: the PTET election is only as good as the financial records sitting behind it.
To calculate your entity-level state tax correctly, you need accurate income figures allocated to each state. To pay quarterly PTET estimates on time, you need up-to-date books. To issue clean K-1s that show each owner's correct credit, your financial records need to be reconciled and audit-ready. And if the IRS or a state tax authority ever questions your election, the first thing they will ask for is documentation, which means your books need to tell a clear, accurate story.
For law firms, this already runs alongside existing compliance requirements: trust account reconciliation, IOLTA management, billable hour tracking, and operating account separation. Adding PTET administration on top of that is a significant lift, especially for small and mid-size practices without a dedicated finance team.
This is exactly where Bookkeeper.law makes a measurable difference.
Trusted by 1,000+ law firms, Bookkeeper.law provides virtual legal bookkeepers who specialize in the financial operations of legal practices. They do not just handle general bookkeeping. They understand the compliance layer that law firms operate under, and they keep your financials in the shape you need them to be for tax planning decisions like PTET elections to work correctly.
Here is what Bookkeeper.law's virtual legal bookkeepers handle that directly supports PTET compliance:
- Monthly bookkeeping that keeps income figures current, accurate, and allocated correctly by entity and by state
- Bank account reconciliation that ensures your operating accounts reflect actual cash positions before quarterly PTET estimates are due
- Financial statement preparation that gives your tax advisor the clean, organized data they need to calculate your PTET liability without delays
- Trust accounting that properly separates client funds from operating income so your taxable income figures are never inflated by commingled funds
- Tax preparation support that ensures PTET payments are properly recorded as business expenses in your books, not buried under general tax line items
- Payroll processing that keeps owner compensation and pass-through income clearly separated, which matters for states that calculate PTET on net distributive income
Your tax attorney or CPA makes the PTET election. Bookkeeper.law keeps the financial foundation solid enough for that election to actually deliver its full benefit.
Your Next Move Before the Window Closes
The SALT cap workaround is not a gray-area strategy. It is a state-level mechanism that the IRS has approved in writing, and more than 36 states have passed legislation to make it accessible. For pass-through business owners and law firm partners in high-tax states, it is one of the most valuable planning tools available right now.
The window is tied to the TCJA cap. If Congress eliminates the cap after 2025, much of the urgency disappears. If the cap gets extended or made permanent, every year you skip the PTET election is money left on the table.
Before anything else, three things need to happen:
- Check whether your entity qualifies in each state where you operate. Look at entity type, ownership structure, and your state's specific PTET statute.
- Get the election deadline on your calendar. Missing it means losing the federal benefit for that entire tax year. There is no retroactive fix.
- Get your books in order. A PTET election is only as defensible as the financials behind it. Clean, accurate, reconciled books are not optional here.
If your law firm's financial records are not currently in the shape needed to support a PTET election confidently, Bookkeeper.law can help you get there.
Bookkeeper.law connects law firms with virtual legal bookkeepers who specialize in legal finance, trust accounting, and compliance-ready financial reporting. Trusted by 1,000+ attorneys across the country.
Book a free consultation with Bookkeeper.law today
Frequently Asked Questions
Does the SALT cap workaround actually work for S corporation owners?
Yes. IRS Notice 2020-75 explicitly confirmed that S corporations can elect to pay state income tax at the entity level and deduct it as a business expense. That deduction reduces each shareholder's pro-rata share of income on their Schedule K-1, lowering their federal taxable income without triggering the $10,000 individual cap. Most states that have enacted PTET legislation include S corporations alongside partnerships and LLCs.
What happens to the SALT cap after 2025?
The $10,000 cap is a temporary TCJA provision that expires after December 31, 2025. If Congress takes no action, the cap reverts to pre-2018 rules and SALT becomes fully deductible again. Multiple proposals have been introduced to extend, raise, or make the cap permanent, but as of May 2025 nothing has passed. The PTET workaround remains worth using in any scenario where a state income tax liability exists and the cap is still in force.
Can a single-member LLC use the SALT cap workaround?
Usually no, but it depends on the state. Most states restrict PTET elections to entities with at least two owners because single-member LLCs are treated as disregarded entities for federal tax purposes. Some states, including New York, allow single-member LLC participation under specific conditions. Check your state's PTET statute directly before assuming eligibility or ineligibility.
Is there a risk the IRS could challenge a PTET election?
The IRS has not challenged properly structured PTET elections that follow Notice 2020-75. The notice itself signals that favorable final regulations are coming, which is about as strong a legal signal as you can get outside of a completed rulemaking. Risk goes up with aggressive implementations in tiered partnership structures, elections involving corporate or non-resident owners, or any situation where documentation is thin. The best protection is thorough records of the election filing, the tax payment, and the credit allocation to each owner.
