In 30+ U.S. states, pass-through businesses can elect to pay income tax at the entity level to bypass the $10,000 SALT deduction cap. But not in Texas. Why has Texas avoided adopting a PTET regime, and what does that mean for LLCs, S-Corps, and partnerships operating in the state?
What is PTET?
The Pass-Through Entity Tax (PTET) is a workaround to the federal SALT deduction cap introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. The cap limits the deduction of state and local taxes to $10,000, significantly affecting business owners in high-tax states.
PTET allows entities such as LLCs, partnerships, and S-Corps to pay state income tax at the entity level, which is fully deductible at the federal level under IRC §164.
States That Allow PTET (as of 2025):
California, New York, New Jersey, Illinois, Georgia, Michigan, and over two dozen others.
Why Doesn’t Texas Offer a PTET Election?
Because Texas has no personal or corporate income tax, the concept of a PTET does not apply in the same way. Here’s why:
- No personal income tax means there’s no SALT cap issue for Texas residents.
- Franchise tax is already levied at the entity level in Texas.
- Therefore, there’s no need to create a PTET workaround, since business owners don’t lose federal deductions on Texas taxes in the first place.
Bottom Line: Texas doesn’t need PTET because its tax system already avoids the SALT cap indirectly.
Relevant Forms and Codes
Federal:
- IRC §164 – Deductibility of taxes
- IRS Notice 2020-75 – Confirms federal deductibility of PTET
Texas:
- Form 05-158-A – Franchise Tax Report (No PTET election available)
- Form 05-163 – EZ Computation Franchise Report (if eligible)
Example: Texas vs California
Texas S-Corp:
- No state income tax for shareholders
- Franchise tax paid at entity level
- No SALT cap issue
- No PTET needed
California S-Corp:
- State income tax due by owners
- PTET allows entity to pay tax on behalf of owners
- Federal deduction permitted for full state tax paid at entity level
- Owners avoid SALT cap limitations
Conclusion: Texas businesses are already enjoying what PTET provides , without the need for legislation.
Compliance Steps for Texas Business Owners
Even though PTET isn’t available in Texas, business owners should still:
- Ensure proper franchise tax compliance via Forms 05-158-A or 05-163.
- Understand the limits of SALT deduction for non-Texas sourced income if filing in other states.
- Review nexus rules if operating outside of Texas , other states may impose PTET.
- Consult with a CPA if you live in a PTET state but operate a Texas entity.
- Document all state-level tax payments for potential federal deductions where allowed.
Conclusion
Texas doesn’t offer a PTET election , not because it’s behind, but because it doesn’t need one. With no state income tax, Texas pass-through owners already avoid the SALT deduction issue faced in other states. The Texas franchise tax is already entity-level, satisfying the same policy goal PTET seeks to fix elsewhere.
Call to Action
Schedule a consultation with Anshul Goyal, CPA, EA, FCA to review your multistate pass-through entity strategy and SALT deduction exposure. If you’re a Texas-based founder earning income in PTET states, we can help you stay compliant and optimize deductions.
Disclaimer:
This blog is for educational purposes only and does not constitute tax or legal advice. PTET compliance may still apply if your business has operations in other states.
Top 5 High-Searched FAQs
1. Does Texas allow pass-through entity tax (PTET)?
No. Texas has no personal income tax, so PTET is not needed or available.
2. Why do other states offer PTET elections?
To allow pass-through entities to deduct state income tax at the entity level and bypass the SALT cap.
3. Is Texas franchise tax similar to PTET?
Yes, in that it is paid at the entity level and doesn’t affect federal SALT deduction limitations.
4. Do I need to worry about PTET if I live in Texas but earn income in other states?
Yes. You may have PTET exposure or opportunities depending on where income is sourced.
5. What is the SALT deduction cap?
It limits the federal deduction for state and local taxes to $10,000 for individuals (as per TCJA).
About Our CPA
Anshul Goyal, CPA, EA, FCA is a Certified Public Accountant licensed in the U.S., Enrolled Agent admitted to practice before the IRS, and Fellow Chartered Accountant. He advises on state and federal taxation for founders, startups, and cross-border clients. Anshul helps Texas-based and multistate businesses manage SALT deduction limits, franchise tax reporting, and entity planning.