How it works
Individuals can deduct only a limited amount of state and local taxes on their federal returns. When a partnership or S corporation elects to pay state income tax itself, that tax is generally deductible by the business, reducing the income that flows to the owners. Owners then receive a credit on their state returns for the tax the business paid.
After the 2025 tax law
The 2025 law raised the individual state and local tax deduction cap to $40,000 for 2025 ($40,400 for 2026), but phases it back toward $10,000 for higher incomes. It left entity-level elections in place. For many business owners, especially higher earners in New Jersey and New York, BAIT and PTET still produce meaningful federal savings.
New Jersey BAIT and New York PTET
- New Jersey's Business Alternative Income Tax (BAIT) is elected annually by eligible partnerships, S corporations and LLCs taxed as either. The tax is paid by the entity and credited to the owners.
- New York's Pass-Through Entity Tax (PTET) must be elected online by March 15 for each year, and estimated payments are due during the year. Missing the deadline means missing the year.
- New York City has a separate city PTET for eligible city resident owners.
Who benefits most
- Owners whose state tax is well above the deduction cap or who are in its phase-down range
- Profitable partnerships and S corporations, including professional practices
- Owners who live in one state and own a business in the other. Credits between the two states need careful handling.
The election isn't automatically beneficial for every owner, so it's worth modeling each year.
Frequently asked questions
Is the PTET or BAIT election worth it after the 2025 SALT cap increase?
For many owners, yes, especially higher earners whose deduction is phased down or whose state taxes exceed the cap. It depends on each owner's situation, so we model it before the election deadline.
When is the New York PTET election due?
It must be made online by March 15 of the tax year it applies to, and it's an annual election.
Can a sole proprietor use BAIT or PTET?
No. The elections are for entities taxed as partnerships or S corporations.
Do all owners have to agree?
The entity makes the election, but it affects every owner's taxes, so owners should be on the same page before it's made.