Pass-Through Entity Tax Elections and Syndication Investors
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A pass-through entity (PTE) tax election lets a partnership, including a syndication LLC taxed as one, pay state income tax itself on its income instead of leaving every investor to pay it personally. Because the entity pays, the partnership generally deducts the tax in figuring income, which can work around the federal limit on the state and local tax (SALT) deduction on an individual return. In a syndication the manager usually decides whether to elect, and each investor sees the effect on the K-1 and their state return.
This post is for investors who find "PTET" or "PTE tax" on a K-1 or in an update from the sponsor. It is general information as of October 2026, not tax advice; ask your own tax adviser.
Why does the SALT limit make this matter?
An individual who itemizes deductions can deduct state and local taxes only up to a federal limit. Congress has changed the amount in recent years, so use the current figure with your adviser. State income tax on a partnership's income is part of an investor's state bill, and a high earner with income from several states can reach the limit quickly. If the partnership pays the tax instead, the deduction happens at the entity level and flows through as a lower K-1 income figure.
How does the election work in a syndication?
- The manager or the deal's accountant decides whether to make the election for the year, based on the operating agreement.
- The partnership files the election with the state, often by a deadline tied to the return or an estimated payment.
- It pays the entity tax, sometimes in estimated payments during the year.
- The K-1s show each investor's share of income net of the deduction, and the state may give each investor a credit or exclusion.
- Each investor's own return claims that credit.
What does an investor need to know?
| Question | Why it matters |
|---|---|
| Which states does the deal operate in? | Only some states offer a PTE election, and nonresident investors may be included or not. |
| Does the operating agreement let the manager elect without consent? | Many do, and some tie it to investor consent. |
| Who bears the cost? | The partnership pays, so every investor's distributions effectively fund it. |
| Does the credit cover my own state? | A resident of a state with no credit for another state's PTE tax may see less benefit. |
| Do I itemize? | If you take the standard deduction, a SALT deduction would not have helped you. |
A simple illustration
This is a hypothetical example, not a calculation. A partnership has $100,000 of state taxable income to allocate, and its state taxes it at 5% when the entity elects, so the partnership pays $5,000. The partnership deducts the $5,000, so each investor's K-1 income is lower in total by $5,000, and each investor may claim a credit for their share on the state return. If the same partnership had a loss that year, there would be no PTE tax to pay, and investors would simply see a lower or zero state result.
Questions to ask the sponsor
- Do you expect to make the election and in which states?
- When would the entity tax be paid and will it affect distributions?
- Will the K-1 show a separate line for the tax paid on my behalf?
See also state tax returns for nonresident investors and what K-1s report.
Related guides: Syndication tax guides and Estimated taxes on K-1 income.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings from their friends and followers under Rule 506(b) or 506(c). The deal's accountant prepares the K-1s and decides on state elections such as a PTE tax; DoorRaise delivers each K-1 to the investor, which the $5,000 yearly administration fee covers, and gives no tax advice. Fees: $1,500 to set up (non-refundable), then $5,000 a year from closing (only if the deal closes). See investor reporting and pricing.
FAQ
What is a PTE tax election?
A choice by a partnership or S corporation to pay state income tax on its income at the entity level, offered by many states.
Why do partnerships elect to pay PTE tax?
To make the tax deductible at the entity level, which can reduce federal tax for owners who would be limited by the SALT cap.
Does the PTE election change my K-1?
It can lower the income allocated to you and may show a credit or payment made on your behalf. Check the footnotes with your CPA.
Can I opt out of a PTE election?
That depends on the operating agreement and the state. Ask the sponsor before the year ends.
Is the PTE tax the same in every state?
No. Eligibility, rates, credit rules and deadlines vary by state.
Sources
- IRS: Notice 2020-75, Forthcoming regulations on the deductibility of state and local income taxes paid by partnerships and S corporations
- New York State: Pass-through entity tax
- IRS: Publication 541, Partnerships
- IRS: Partners' Instructions for Schedule K-1 (Form 1065)
This article is general information as of October 2026, not tax, legal or investment advice. The example is hypothetical. Ask your own tax adviser. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.