Pass-Through Entity Tax (PTET) for Law Firm Partners: The SALT Workaround That Still Matters in 2026
The OBBBA raised the SALT deduction cap to $40,400 — but for any equity partner with MAGI above $600K, the phaseout claws it back to $10,000. PTET remains the primary federal tax lever available to partners in high-tax states, and it can save $30K–$80K+ per year. Here's how it works and whether your firm should be electing it.
What the OBBBA actually did to the SALT cap — and why it doesn't help most equity partners
The One Big Beautiful Bill Act (July 2025) expanded the SALT deduction cap from $10,000 to $40,400 for 2026. On paper, a big win for high-income residents of New York, California, and New Jersey. In practice, it barely moves the needle for equity partners.
The expanded cap phases out for MAGI above $500,000 at a rate of 30 cents per dollar of excess income. By the time MAGI reaches $600,000, the cap is reduced back to roughly $10,000 — the same as before.1 A partner at a mid-size AmLaw firm earning $700K MAGI faces essentially the same SALT deduction constraint they've faced since 2018.
| MAGI | Effective SALT cap (2026) | PTET still needed? |
|---|---|---|
| Below $500K | $40,400 | Depends on state tax bill |
| $550K | $25,400 | Likely, if state taxes > $25K |
| $600K | ~$10,400 | Yes |
| $700K+ | $10,000 | Yes — same as before OBBBA |
MFJ phaseout begins at $500K and is fully phased out at ~$635K MAGI. Most equity partners at AmLaw 200 firms earn well above $635K.
The PTET bypass is unaffected by the OBBBA — it's a completely separate mechanism from the itemized SALT deduction. PTET continues to operate exactly as before for 2026 and beyond.
How PTET works: the three-step bypass
The TCJA's $10,000 SALT cap applies to individual itemized deductions. It does not apply to business deductions. Pass-through entity taxes are deducted at the entity level as a business expense — which flows through as reduced partner income on the K-1 — bypassing the cap entirely.
- The firm elects PTET. The law firm makes an annual election to pay state income tax at the entity level. The election is made by the firm — not by individual partners — which means pushing for PTET adoption may require working through your firm's finance or management committee.
- The firm pays the PTET. The partnership pays state income tax at the applicable PTET rate on its distributable income. This payment is deducted as a federal business expense. The deduction reduces each partner's K-1 income by their proportionate share — fully deductible, no cap.
- Each partner takes a state credit. Each partner receives a state income tax credit equal to their allocable share of PTET paid. The credit offsets what would otherwise be their personal state income tax obligation on the same income. Net state tax cost = approximately zero; net federal deduction = full PTET amount.
The federal tax math for a $1M NY income partner
Assume an equity partner has $1,000,000 of New York-allocated income and is in the 37% federal bracket.
| Item | Without PTET | With NY PTET |
|---|---|---|
| NY income tax obligation (~10.9% top bracket) | $109,000 | $109,000 |
| Federal SALT itemized deduction | $10,000 (capped) | $0 (replaced by K-1 reduction) |
| Federal deduction for state taxes | $10,000 | $109,000 |
| Federal tax benefit at 37% | $3,700 | $40,330 |
| NY state tax paid net of credit | $109,000 | ≈ $0 (PTET credit) |
| Net annual PTET advantage | +$36,630 |
The PTET doesn't reduce what you owe in NY state taxes — the credit keeps that flat. It converts state income taxes into a fully deductible federal business expense instead of a capped personal itemized deduction. The benefit is 100% federal.
State-by-state PTET summary (2026)
Over 30 states now have PTET regimes. The five most relevant to Big Law attorneys:
| State | PTET rate (2026) | Credit % | Election deadline | Notes |
|---|---|---|---|---|
| New York | 6.85%–10.90% (graduated)2 | 100% | Mar 15 annually | NYC PTET available at +3.876% for NYC resident partners |
| California | 9.3% flat3 | 100% | June 15 prepayment (SB 132) | Extended through 2031 by SB 132; late prepayment = 12.5% credit reduction (not disqualifying) |
| New Jersey | Graduated: 9.12% ($1M–$5M); 10.9% (over $5M)4 | 100% | Mar 15 of following year | Called the Business Alternative Income Tax (BAIT) |
| Connecticut | Mandatory (entity-level) 5 | 87.5% | No election — automatic | First state to enact (2018); no opt-in required; credit limited to 87.5% |
| Massachusetts | 5.0% flat5 | 90% | Filed with return (Form 63D-ELT) | Credit is 90% (10% residual federal benefit on remaining 10%) |
NY equity partners get a double layer. If the firm elects both NY PTET and NYC PTET, a partner with $1M of income allocated to NYC gets a federal deduction for both the NY PTET (~$109K) and the NYC PTET ($38,760) — generating over $55,000 in combined federal tax savings at 37%.
PTET savings calculator
Estimate your annual federal tax benefit from your firm's PTET election. Inputs are your share of income allocated to the state, not firm-wide income. Partner allocations vary by firm structure — use your K-1 state allocation or ask your firm's tax department.
Annual PTET Benefit Estimator
Estimates only. Actual PTET depends on firm-level computation, allocation methodology, and state-specific rules. Consult a CPA familiar with your firm's structure.
Planning considerations for equity partners
You can't elect PTET unilaterally — the firm decides
Unlike an IRA contribution or HSA election that you control, PTET is elected at the entity level. Your firm's managing partner, executive committee, or finance committee controls the annual election. If your firm hasn't elected PTET in NY or CA, you're leaving tens of thousands of federal tax savings on the table every year — and you may need to make the case internally.
Key arguments to bring to your firm's finance team: (1) the election is cost-neutral to the firm, since the PTET credit offsets partners' individual state tax obligations; (2) partners in high-tax states benefit substantially; (3) partners in no-income-tax states (TX, FL) are unaffected; and (4) most AmLaw 100 firms already elect PTET — if your firm doesn't, it's a competitive issue for partner recruiting.
Multi-state partners: stacking two PTET elections
A partner at an AmLaw firm with both New York and California operations may have income allocated to both states. If the firm elects PTET in both NY and CA:
- NY PTET on, say, $700K of NY-allocated income ≈ $48,000 → federal deduction value at 37% ≈ $17,750
- CA PTET on $300K of CA-allocated income ≈ $27,900 → federal deduction value at 37% ≈ $10,323
- Combined annual PTET advantage ≈ $24,000 (after netting the foregone SALT cap benefit once)
Multi-state partners typically benefit more than partners with income concentrated in a single lower-rate state.
NYC PTET: the additional layer for city residents
If the firm elects NYC PTET in addition to NY PTET, NYC resident partners generate a second federal deduction — 3.876% on their NYC-allocated income — on top of the NY PTET deduction. At $1M of NYC income, this adds approximately $14,341 in annual federal tax savings. The NYC PTET credit offsets the partner's NYC income tax, so the net NYC tax cost is approximately zero.
The NYC PTET is only available when all partners receiving the credit are NYC residents or the election covers only NYC resident partners' allocable income. For firms with many non-NYC partners, this may require a more complex computation.
Estimated tax adjustments
When your firm pays PTET, you'll still receive a K-1 with reduced income (net of PTET), but your state tax obligation is largely offset by the PTET credit. Work with your accountant to reduce your personal estimated state tax payments accordingly. Continuing to pay full personal state estimated taxes while the firm is also paying PTET can result in a large state refund — it won't cause problems, but you're giving the state an interest-free loan.
AMT interaction
Under the alternative minimum tax (AMT), the personal SALT deduction is disallowed entirely — not just capped. The PTET approach sidesteps this because the deduction is taken at the entity level as a business expense and flows through as reduced K-1 income, which is not added back in the AMT computation. Partners with significant AMT exposure benefit even more from PTET than the regular-tax numbers suggest.
When PTET doesn't help
PTET is not universally beneficial for every partner in a firm:
- Texas / Florida / Nevada partners: no state income tax → no PTET to elect → no federal deduction. These partners are unaffected by the firm's PTET election (they have no allocable state income to run through PTET).
- Partners with MAGI below $500K: the new $40,400 SALT cap may already cover their state income taxes, reducing the marginal benefit of PTET. First-year equity partners or partners in lower-paying lockstep slots may not benefit as much.
- Partners with large state credit carryovers: if you already have unused state credits from prior years, additional PTET credit may not be immediately usable. Check your state return for carryforward position.
The PTET planning conversation your advisor should be having with you
A financial advisor who specializes in Big Law compensation should be asking three questions about PTET every year:
- Has your firm elected PTET in every state where you have significant allocated income? If not, what's the estimated annual cost of not electing?
- Are your personal estimated tax payments adjusted to reflect the PTET your firm is paying on your behalf?
- If the firm has not elected PTET, what's the advocacy path — and is the math compelling enough to raise it formally?
A generalist advisor won't know to ask any of these questions. A specialist who works with Big Law attorneys regularly will have the PTET conversation as a standard part of year-end planning.
Work with an advisor who knows Big Law PTET
PTET is one of several planning levers available to law firm equity partners that a generalist advisor won't address. If you're a partner at an AmLaw firm in NY or CA and no one has run the PTET math for your situation, you may be leaving $30K–$80K in annual federal savings on the table.
Sources
- Internal Revenue Service / Bipartisan Policy Center: SALT Deduction Changes in the One Big Beautiful Bill Act — 2026 cap $40,400, phaseout at MAGI $500K–$600K. Cross-checked with Anchin: SALT Deduction Cap Under OBBBA.
- New York State Tax Department: Pass-through entity tax (PTET) — 2026 graduated rates 6.85%/9.65%/10.30%/10.90%; annual election by March 15. NYC PTET at 3.876%: New York City pass-through entity tax.
- California Franchise Tax Board: Pass-through entity (PTE) elective tax — 9.3% flat rate. SB 132 extension through 2031: California PTE Tax Changes for 2026 (SB 132).
- New Jersey Division of Taxation: PTE/BAIT FAQ — BAIT rates, 100% credit, annual election deadline March 15 of following year.
- EisnerAmper: Differences Among State Pass-Through Entity Taxes — CT mandatory PTET (87.5% credit), MA 5.0% flat rate (90% credit). Anchin law firm PTET analysis: PTET Insights for Multi-State Law Firms.
Tax values verified against 2026 sources as of June 2026. OBBBA enacted July 2025; CA SB 132 enacted 2025 (extended PTET through 2031). Federal bracket thresholds per IRS Rev. Proc. 2025-32.