Blog · 15 October 2026

PTET Elections and the 2026 SALT Cap: $40,400 Phase-Down, Notice 2020-75 and What US CPA Firms Should Tell Pass-Through Clients

By Keshav Bansal, CA

For 2026, the individual SALT cap is $40,400 ($20,200 if married filing separately)—but it phases down once modified adjusted gross income (MAGI) exceeds $505,000, and a pass-through entity tax (PTET) election can still move state income tax outside that individual limit. US CPA firms that treat the higher OBBBA cap as the end of entity-level elections will leave money on the table for owners already in the phase-down—or whose property taxes alone fill the Schedule A slot.

The 2026 SALT cap under IRC §164

IRC §164(b)(7), as amended by the One Big Beautiful Bill Act (P.L. 119-21), sets the “applicable limitation amount” at $40,400 for taxable years beginning in calendar year 2026 ($40,000 for 2025). Married individuals filing separately use half. The IRS correction notice for 2026 Form 1040-ES restates the same figures: the overall limit is $40,400 ($20,200 MFS), reduced if MAGI is more than $505,000 ($252,500 MFS), but not below $10,000 ($5,000 MFS).

Under §164(b)(7)(B), for taxable years beginning before January 1, 2030, the applicable limitation is reduced by 30 percent of the excess of MAGI over the threshold ($505,000 for 2026; half if MFS). The reduction cannot push the limit below $10,000. Virtue CPAs (Rick Patel, Oct. 6, 2026) illustrates three joint-return points: MAGI $555,000 → $25,400 cap; MAGI $605,000 → $10,400 cap; MAGI of about $606,334 or more → $10,000 floor. For taxable years beginning after calendar year 2029, §164(b)(7)(A)(iv) returns the applicable limitation to a flat $10,000 (half MFS), unless Congress changes the law.

What a PTET election does—and Notice 2020-75

A PTET (sometimes labeled PTE elective tax) lets a partnership or S corporation elect to pay state income tax at the entity level. Owners typically receive a state credit or exclusion so the same income is not taxed twice at the state level. Federally, IRS Notice 2020-75 announced forthcoming regulations clarifying that “Specified Income Tax Payments”—amounts paid by a partnership or S corporation to a state, political subdivision, or the District of Columbia to satisfy income-tax liability imposed on the entity—are deductible by the entity in computing non-separately stated income or loss for the year of payment. Those payments are not separately taken into account by owners under §§702 or 1366 and are not taken into account in applying the SALT deduction limitation to any individual. Taxpayers may rely on the notice pending proposed regulations.

Virtue CPAs notes that more than 30 states now have some form of elective PTET regime (details and deadlines vary widely). States without a personal income tax generally have nothing to elect. RSM’s OBBBA SALT/PTET analysis adds that the final legislation left PTET deductibility and election mechanics intact.

California 9.3% and New York’s March 15 election

California’s Franchise Tax Board describes the PTE elective tax as 9.3% of the qualified entity’s qualified net income. For taxable years beginning on or after January 1, 2026, and before January 1, 2031 (the 2026–2030 window), FTB says qualifying partnerships and S corporations may elect on a timely filed original return (FTB 3804), with a June 15 initial payment. If that June 15 payment is missed or short, the entity may still elect—but each qualified taxpayer’s credit is reduced by 12.5% of their pro rata share of the unpaid June 15 amount. Consenting owners claim the credit on FTB 3804-CR.

New York’s Department of Taxation and Finance treats PTET as an optional Article 24-A tax for eligible partnerships and New York S corporations. An eligible entity may opt in on or after January 1 but no later than March 15 of the PTET taxable year (next business day if March 15 falls on a weekend or legal holiday). The election is made online through Business Online Services; tax professionals may not opt in for clients. For calendar year 2026, DTF put the election due March 16, 2026 because March 15 was a Sunday—so as of mid-October 2026, the 2026 New York election window has already closed. Firms should calendar the 2027 opt-in and treat estimated-payment dates separately from the election itself.

QBI and other side effects

Entity-level PTET reduces non-separately stated income that flows on the K-1. Virtue CPAs’ Oct. 6 model shows that lower income can shrink the §199A qualified business income (QBI) deduction (for example, 20% of a $50,000 PTET payment is a $10,000 QBI cut), so the net federal benefit is the entity deduction minus QBI and other interactions—not the raw state tax times the ordinary rate. Partnership agreements, S corporation rules, basis, and whether owners still itemize after the entity pays the tax all belong in the model. Pair PTET math with our QBI deduction 2026 / §199A guide. For broader state-tax context, see the state millionaire tax 2027 roundup and California Prop 40 / domicile vs residency. The draft 2027 Form W-4 OBBBA materials mention a SALT worksheet only in passing—they are not a PTET substitute.

CPA checklist for 2026–2027 PTET season

1. Compute the client’s 2026 SALT cap before electing. Start from $40,400 / $20,200; apply the 30% MAGI reduction over $505,000 / $252,500; floor at $10,000 / $5,000 (IRS 1040-ES correction; §164(b)(7)).
2. Inventory all Schedule A SALT. Property tax, wage-state tax, and pass-through state tax share one cap—PTET removes business-income state tax from that competition (Notice 2020-75).
3. Model QBI, basis, and itemize-vs-standard. Entity deduction lowers K-1 income and can cut QBI; some owners may take the standard deduction while still benefiting from the entity-level payment.
4. Confirm the state’s election and payment calendar. New York’s March 15 opt-in (next business day if needed) is early; California’s election is on the timely original return with June 15 prepayment rules for 2026–2030.
5. Document owner consent and allocation. California requires consenting qualified taxpayers; partnerships with special allocations and multi-state owners need agreement language before the election locks.
6. Plan past 2029. The enhanced federal cap is scheduled to revert to $10,000 for taxable years beginning after 2029—revisit elections when that cliff approaches.

Where Tax Brew fits

PTET files are multi-state and document-heavy: election proofs, estimated vouchers, K-1 footnotes, and owner credit worksheets. Tax Brew supports US CPA firms with tax prep support, bookkeeping and cleanup so reviewers can spend more time on the SALT-cap and QBI model. See our services, or email info@taxbrewglobal.com.

Sources: IRC §164(b)(6)–(7) (uscode.house.gov / Cornell LII); IRS correction to 2026 Form 1040-ES SALT reminder (reviewed Mar. 16, 2026); IRS Notice 2020-75; Virtue CPAs, Rick Patel, “Pass-Through Entity Tax (PTET) Elections in 2026” (Oct. 6, 2026); California FTB Pass-through entity (PTE) elective tax page (updated Apr. 23, 2026) and FTB 3893 (2026) instructions; New York DTF Pass-through entity tax (PTET) page and PTET Web File instructions; RSM, “SALT cap receives modest and temporary update in the One Big Beautiful Bill Act.” General information, not tax advice. State PTET rules differ—confirm each state’s current statute and forms.