Pass Through Entity Tax Explained

Pass Through Entity Tax Explained

Today's Newsletter:

• My Latest

• Clear as Mud

• Pass Through Entity Tax Explained

• A Money Question

My Latest

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• Why it feels weird

• How to build a spending framework

• The difference between fixed and variable

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Clear as Mud

So much of life is about understanding your options.

Said another way, you have to understand how you can improve.

Let me give you an example from my baseball career.

For more than a decade, my version of “getting better” was throwing a bullpen and eyeballing what was good and what was bad.

It sounds reasonable, but when you are thrusting your body as hard as you can to throw 90+mph, it is like living on the hope train.

You are simply hoping that your body will correct and align with what your mind is telling it.

You are then hoping that a random thought translates into the game and sticks with a runner on second, two outs, and the game on the line.

Yeah…not really a great strategy.

In fact, getting better in those days felt about as clear as mud.

The thing that changed all of this from training to implementation was the influx of data into pro sports.

• No longer were you hoping

• No longer were you eyeballing things

• No longer were you thinking, “I wonder if this will work”

Instead, you had a clear insight into how to improve.

Well, just like baseball, many things in life work just like that.

They are about as clear as mud until someone can show you with an explanation and data.

Well today, I want to talk to you about one of those concepts for business owners.

It is the Pass Through Entity Tax, PTET for short, and it is one of the most misunderstood (and valuable) planning tools out there.

Let’s dive in…

Pass Through Entity Tax Explained

We are going to break this down into four sections:

• What is PTET?

• Who can you use it?

• Why it matters? (Case Study)

• The planning move you need to consider (High Earners Especially)

What Is PTET?

PTET is a way for businesses like partnerships, S-corps, and LLCs to pay state taxes at the business level instead of the personal level.

Here’s why that matters:

Normally, business income "passes through" to the owner. Then the owner pays taxes on their personal return. But ever since the SALT cap was put in place, you can only deduct up to $10,000 in state and local taxes. That limit hurts entrepreneurs in high-tax states.

PTET changes that.

By paying the tax through the business, you can get around the $10,000 cap and take a full federal deduction.

Said another way:

PTET is like a backdoor to get a bigger tax write-off.

Who Can Use It?

This is a state-by-state decision.

Not every state offers PTET, but many do. Some of the most relevant for our clients include:

• California

• New York

• Illinois

• New Jersey

• Connecticut

• Georgia

• Arizona

• Colorado

• Oregon

• Minnesota

Each state has its own rules, deadlines, and rates. But the play is the same:

If you own a pass-through business in one of these states, PTET is worth looking into.

In fact, I would argue that if you aren’t doing it, you'd better have a really good reason why.

Let me show you why this matters…

Why It Matters (Case Study)

Let’s use a quick story to show the real numbers.

Meet Taylor.

***Taylor owns an S-Corp that earns $1,000,000 in income.
***She lives in California, where the state tax rate is high.

Without PTET:

• Her business income passes through to her personal return.

• She can only deduct $10,000 in state taxes on her federal return.

• That means she loses out on a big federal deduction.

With PTET:

• Her business pays California tax directly.

• She deducts the full $100,000+ of state tax as a business expense.

• That lowers her federal taxable income by over $90,000.

Federal tax savings? Around $33,000.

• Same state

• Same income

• Different result

Said another way, without PTET, you are quite literally volunteering to leave your state government a tip.

Not something that has been on the top of my giving list in recent years…

What’s New for 2025?

Here’s where it gets interesting…

Starting in 2025:

• The SALT cap can extend to $40,000.

• That’s a huge shift from the current $10,000 SALT cap.

• Yet an AGI (Adjusted Gross Income) over $600,000 starts to reduce that cap.

• Remember, the SALT deduction includes state taxes, local/city taxes, and property taxes.

So, if you have more than $10,000 in just property taxes, you need to be planning around your total AGI (if close to $600,000).

Why PTET still plays a major role:

• Many entrepreneurs will still earn above that $600,000 AGI mark.

• Even if the cap rises, PTET may still provide bigger savings, especially in high-tax states.

• For families close to the $600,000 limit, smart planning becomes everything.

______________________

Much of good tax planning sounds confusing on the surface.

In fact, for me it usually is about as clear as mud.

Yet, we need to understand how to plan around these things.

You have worked too hard to just give the IRS a tip.

My hope is that this clarified one of the more valuable (and confusing) tax planning strategies out there.

Until next time, my friends!

____________________

A Money Question

What is your number?

Now, some people would say that you don’t need a “number”.

I tend to lean the opposite way.

I like having a number. One that represents financial freedom (however you define that).

I like it because it makes you do the real planning and determine what it should be!

______________________

3 Ways I Can Help You

💰 Schedule an introductory call with Moment. We help athletes, entrepreneurs, and key employees build and protect wealth.

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Moment Private Wealth, LLC is a Registered Investment Advisor, located in the State of Missouri. Moment Private Wealth provides investment advisory and related services for clients nationally. Moment Private Wealth will maintain all applicable registrations and licenses as required by the various states in which Moment Private Wealth conducts business, as applicable. Moment Private Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or under an applicable state exemption or exclusion. Nothing in this content is intended to be, and you should not consider anything in this content to be, investment, accounting, tax, or legal advice.