A Pass-Through Entity (PTE) tax election can be made by certain businesses (such as partnerships and S corporations) to pay their state or local taxes at the entity level instead of passing through those tax liabilities to partners. Around 40 states to date have launched a PTE election that serves as a workaround to the federal State and Local Tax (SALT) deduction limitation created by the Tax Cuts and Jobs Act of 2017, which capped individual deductions at $10,000 per household.

Making this election allows entities to pay the state and local taxes directly instead of passing the liability through to partners who might have reached the deduction limit and would not be able to deduct the taxes that were generated from their partnership interest or corporation ownership.

Beginning in 2026, the SALT deduction cap is scheduled to increase to $40,000 under the One Big Beautiful Bill (OBBB), which greatly reduces the usefulness of the PTE election.

However, most investment clubs or investing partnerships probably cannot benefit from PTE elections in the first place. For a partnership to receive a benefit from the PTE tax election, they must report the taxes paid on Page 1 of IRS Form 1065 as part of their business deductions. Investment clubs typically do not have business expenses, only  investment expenses, and the Tax Cut and Jobs Act of 2017 made all expenses of investing partnerships non-deductible. As a result, paying state taxes at the entity level will not generally benefit partners in an investing partnership.

Note: ICLUBcentral does not offer legal, investing, or tax advice, so please consult an attorney or other professional if you have further questions about this topic.