Over the past several years, business owners have
faced a changing tax landscape at both the federal and state levels. One of the most important developments has been the introduction of the Pass-Through Entity Tax (PTET). Indiana adopted its own version of the PTET to help certain business owners reduce their overall tax burden.
As CPAs, we’re frequently asked: What exactly is the Indiana PTET, and should my business elect it? Let’s break it down.
What Is the Indiana PTET?
The Indiana Pass-Through Entity Tax (PTET) is an optional state-level tax election available to certain pass-through entities.
These include:
- S corporations
- Partnerships
- Limited Liability Companies (LLCs) taxed as partnerships or S corporations
Instead of income being taxed only at the individual owner level, the PTET allows the entity itself to pay Indiana income tax on behalf of its owners.
Why does this matter? Because the PTET was designed as a workaround to the federal $10,000 cap on state and local tax (SALT) deductions ($40,000 as of 2025 tax year) for individuals.
Why the PTET Exists: The SALT Deduction Workaround
Under current federal law, individuals can only deduct up to $10,000 ($40,000 as of 2025) of state and local taxes on their personal returns. This cap has had a significant impact on business owners who pay substantial state income taxes.
The PTET shifts the tax payment from the individual to the business entity. Since business taxes are generally deductible without the SALT limitation, the entity-level tax paid under the PTET can often be deducted in full at the federal level—resulting in potential tax savings.
How the Indiana PTET Works
Here’s a simplified overview:
- The entity elects into the PTET on its Indiana return.
- Indiana income tax is calculated and paid at the entity level (currently at Indiana’s individual income tax rate).
- Owners receive a credit on their Indiana personal tax returns for their share of PTET paid.
- The income is still reported to owners, but the state tax burden has effectively shifted.
From a federal perspective, the entity-level tax payment is generally deductible as an ordinary and necessary business expense. It is important to recognize this tax only covers the Indiana STATE Income tax. Taxpayers will still personally pay the County tax.
Potential Benefits for Business Owners
From a CPA’s perspective, the Indiana PTET can offer meaningful advantages.
1. Federal Tax Savings
For many owners, especially those above the SALT cap, the PTET can restore deductions that would otherwise be lost.
2. Cash Flow Efficiency
Rather than each owner making separate estimated tax payments, the entity handles the tax centrally.
3. Planning Flexibility
The PTET opens the door to more proactive tax planning, particularly for profitable pass-through businesses.
Important Considerations Before Electing PTET
While the PTET can be beneficial, it is not a one-size-fits-all solution.
Business owners should consider:
- Ownership structure – Multi-state owners or tiered entities may face added complexity.
- Estimated tax coordination – Individual estimated payments may need adjustment.
- Administrative burden – Elections must be made annually and reported correctly.
- Changing tax laws – The federal SALT cap is currently scheduled to expire after 2025, which could affect the long-term value of PTET elections.
In some cases, the PTET may provide minimal benefit—or even create complications—if not implemented thoughtfully.
A CPA Firm’s Role in PTET Decisions
At a CPA firm level, our role is not just to file the election, but to evaluate whether it makes sense in the context of your overall tax picture.
That includes:
- Modeling federal and state tax outcomes
- Coordinating entity and individual filings
- Ensuring compliance with Indiana requirements
- Reviewing the election annually as laws and income levels change
The PTET can be a powerful planning tool, but only when used strategically.
