PTET Elections for Law Firms: A Partner’s Guide to the SALT Cap Workaround

A pass-through entity tax (PTET) election lets a law firm pay state income tax at the firm level so partners can deduct those taxes federally without running into the SALT cap. For partners in high-tax states, the election can restore a deduction the cap otherwise limits, making it one of the more consequential tax moves available to professional services firms today. How much it helps depends on each partner’s income and where the firm does business.

What Is a Pass-Through Entity Tax (PTET) Election?

A PTET election shifts payment of state income tax from individual partners to the firm itself. Most law firms operate as partnerships, LLCs, or S corporations, so profits flow through to partners who report the income on personal returns. When the firm elects PTET treatment, it pays state tax on that income directly and deducts the payment federally, and partners receive a credit or income adjustment on their state returns. The IRS signaled its acceptance of this structure through guidance released in 2020, and more than 30 states now offer some version of an election.

Why the SALT Cap Matters More to Law Firm Partners

Law firm partners tend to earn well and live in states with high income taxes, so the federal limit on deducting state and local taxes hits them harder than most filers. The 2017 Tax Cuts and Jobs Act capped that deduction at $10,000. The One Big Beautiful Bill Act (OBBBA) raised the cap to $40,000 for 2025, rising slightly each year through 2029, added a phasedown for higher earners, and set the limit to revert to $10,000 in 2030.

How the Deduction Moves From the Partner to the Firm

The mechanics are the whole point. State income tax a partner pays personally counts toward the capped SALT deduction on Schedule A. The same tax paid by the firm under a PTET election becomes a business expense that lowers the income reported to partners before it reaches their individual returns. That entity-level payment sits outside the individual cap and the income-based phasedown, so a partner earning past the phaseout threshold still captures the full benefit.

Who Benefits Most From a PTET Election?

Partners with large state tax bills and income above roughly $500,000 gain the most, since the federal phasedown pushes their personal SALT deduction back toward $10,000. Firms in states such as New York, New Jersey, and Connecticut, where permanent PTET regimes exist, are strong candidates. Earlier drafts of the 2025 law would have blocked service businesses like law firms from the workaround, but the final version kept it available for all pass-through entities. Lower-earning partners or those in no-income-tax states may see little difference, which is why the election deserves partner-by-partner analysis rather than a blanket decision.

What Law Firms Should Weigh Before Making the Election

An election helps many firms, though it introduces coordination and cash flow questions worth reviewing in advance.

Multi-State Complications for Firms With Attorneys Licensed Across States

Firms with attorneys licensed and practicing in multiple states face added complexity. Income gets apportioned across jurisdictions, and each state sets its own PTET rules, rates, and credit mechanics. A partner living in one state while the firm pays PTET in another may or may not receive a full resident credit for taxes paid elsewhere. Some states honor another state’s entity-level tax, and some do not, so the same election can help one partner and create a mismatch for another.

Timing, Estimated Payments, and Election Deadlines

Most PTET elections are annual and, once made, irrevocable for the year. Firms usually owe estimated payments during the year, which affects cash flow and partner distributions. Missing a deadline or underpaying can cost the firm the deduction entirely, and a few state programs are scheduled to sunset, so last year’s approach may need a fresh look.

How Does a Law Firm Make a PTET Election?

Making the election starts with confirming that the firm’s home state offers a PTET regime and checking eligibility for the firm’s structure. From there, the firm opts in through the state’s process, calculates the entity-level tax, and schedules estimated payments to meet state deadlines. Partners then coordinate their individual returns to claim the matching credit or income adjustment. Because a poorly timed or miscalculated election can erase the benefit, most firms model the outcome across partners first, weighing the federal savings against compliance costs and state-level tradeoffs. Looking at this alongside other profit levers gives partners a fuller picture.

Partner With Insero for Your Law Firm’s PTET Planning

Every partnership agreement, state footprint, and partner income profile is a little different, and PTET planning rewards firms that treat it that way. At Insero, we work with law firms and other professional services organizations to model elections across partners, coordinate estimated payments, and align the decision with each firm’s broader tax position. Our team stays engaged throughout the year, bringing proactive ideas instead of reacting at filing time, and we coordinate with your other advisors so the moving pieces stay in sync.

Explore how we support professional services firms with responsive, experienced accounting and advisory guidance built around your goals. Schedule an appointment with Insero to review if a PTET election fits your firm this year.

Resources:

• www.irs.gov/newsroom/irs-provides-certainty-regarding-the-deductibility-of-payments-by-partnerships-and-s-corporations-for-state-and-local-income-taxes
• https://taxfoundation.org/research/all/federal/one-big-beautiful-bill-act-tax-changes/