If you own a pass-through business in Illinois and your CPA hasn’t reviewed whether the PTE election still makes sense for you in 2026, it’s worth having that conversation soon. The analysis got more complicated after 2025, and whether the election helps, hurts, or does nothing now depends on your specific numbers in a way it didn’t before.
The short version: Illinois lets qualifying pass-through entities pay state income tax at the entity level instead of passing the full liability through to owners’ personal returns. The business deducts that payment federally under IRS Notice 2020-75. The owners receive a credit on their Illinois return. That used to be a near-automatic win for many owners because it bypassed a $10,000 federal SALT deduction cap. The cap changed in 2025, and the math shifted with it.
The Illinois PTE Tax Election Is An Entity-level Federal Deduction, Not An Above-The-Line Deduction
Illinois passed its PTE tax under Public Act 102-0658, effective for tax years ending on or after December 31, 2021. The mechanics: the entity elects to pay Illinois income tax at 4.95% on its net income, takes a federal business deduction for that payment under Notice 2020-75, and each owner receives an Illinois individual income tax credit equal to their proportionate share of PTE tax paid.
The precise characterization matters. This is an entity-level deduction on the business’s federal return, not an above-the-line deduction on the owner’s personal return. The IRS confirmed in Notice 2020-75 that state and local income taxes paid at the entity level are deductible business expenses and therefore not subject to the household SALT deduction cap that applies on Schedule A. The same state tax that would be limited on your personal return becomes a full federal deduction when the entity pays it.
What changed in 2025 is the size of the SALT cap itself. For 2025 and beyond, the federal SALT cap increased from $10,000 to approximately $40,000 (indexed for inflation, approximately $40,400 in 2026 per the One Big Beautiful Bill Act of 2025), and phases out for taxpayers with income above approximately $500,000. For owners below the phaseout threshold, the much larger cap means the portion of SALT previously stuck above $10,000 is now deductible on the personal return anyway. The PTE election still works, but the gap it fills is narrower for most owners than it used to be.
Who Qualifies To Make the Illinois PTE Election?
Eligibility depends on how the entity is classified for federal tax purposes, not on how many owners it has. Partnerships and S corporations are eligible. That covers multi-member LLCs taxed as partnerships, traditional partnerships, and S corporations. A single-member LLC taxed as a disregarded entity does not qualify because it isn’t treated as a partnership or S-corp for federal purposes, regardless of how many members it has.
The election is made on the entity’s Illinois tax return and must be filed by the return due date, including extensions. For most calendar-year entities, that’s October 15 on extension. Amending the election after the deadline is generally not allowed, though the rules around specific circumstances have evolved. This is one to build into year-end planning rather than discover in February.
Illinois does not require unanimous consent from all partners or members to make the election. The decision to elect is made at the entity level on the return, and there is no statutory requirement that every owner agree. If your entity has partners with divergent tax situations, that’s a practical planning conversation worth having, but it’s not a legal barrier to electing.
S-Corps and Partnerships Save at the Entity Level, and the Benefit Now Requires Modeling
The credit mechanism still works cleanly. When the entity pays the PTE tax, each owner gets an Illinois individual income tax credit equal to 100% of their proportionate share. You’re not double-paying Illinois taxes. The entity pays, you get full credit, and the federal deduction is the net benefit.
Let’s look at an example.
We’ve seen this play out with a Metro East S-corp owner running about $400,000 in annual pass-through income. His Illinois individual income tax on that amount at 4.95% would be roughly $19,800. Under the updated ~$40,400 SALT cap, he can deduct approximately $40,400 of state and local taxes on his personal return. If his total SALT from all sources (property taxes, other state income taxes) already uses the full $40,400 cap, then the PTE election converts the remaining Illinois tax above that threshold into a federal entity-level deduction. But if his total personal SALT is well below $40,400 even without the PTE, the personal return may already capture most of the deduction, and the PTE benefit shrinks accordingly.
The right answer now depends on the full picture: total SALT exposure across all sources, income level relative to the phaseout threshold, and federal marginal rate. Owners near or above the $500,000 phaseout face a different analysis than those well below it. This is why the election now requires actual modeling rather than a default yes.
How Much Does the Illinois PTE Election Actually Save in 2026?
The benefit is a function of how much your total SALT exceeds the ~$40,400 cap and your marginal federal income tax rate. The larger SALT cap means many owners who previously benefited from the PTE election because the $10,000 cap was binding are now below the cap on their personal return and gain little or nothing from the entity-level route.
Owners most likely to still see meaningful benefit are those with high combined SALT from multiple sources (significant property taxes plus high Illinois income), those in the phaseout range where the cap starts to compress again, or those with federal marginal rates at 32% or above, where every additional deduction carries more weight.
As a rough framework, the benefit equals the excess of Illinois PTE tax over whatever portion of SALT the owner couldn’t deduct on Schedule A anyway, multiplied by the federal marginal rate. For an owner with $500,000 in pass-through income, the Illinois PTE tax runs to about $24,750. If that owner’s other SALT (property tax, etc.) totals $20,000 and they’re below the phaseout, they can already deduct $40,400 of SALT personally, meaning the first $20,400 of PTE tax is potentially redundant. Only the excess above the cap threshold creates a net federal benefit. At 32%, the incremental benefit on $4,350 of excess deduction is roughly $1,400 annually, far less than the old $10K cap math would have generated.
The Election Must Be Made Annually, And the Deadline is Firm
Illinois treats the PTE election as an annual choice, not a standing election that carries over automatically. You have to opt in each year. For calendar-year entities filing on extension, October 15 is the hard stop for getting the election on record for a given tax year.
Missing the deadline is the most common way this benefit gets lost. We see it happen when year-end planning is rushed or when a new CPA takes over and doesn’t realize the prior firm had been making the election. If you’ve changed advisors recently, it’s worth confirming whether the PTE election was made for the last tax year you filed.
Estimated payments are also part of the picture. Once the entity makes the PTE election, Illinois expects estimated PTE tax payments on the same quarterly schedule as individual estimated taxes. Underpayment at the entity level can trigger penalties, so the estimated payment calculation needs to account for the PTE obligation. That changes the cash flow calendar for the business and is something to coordinate with whoever handles your quarterly payments.
The PTE Election Changes How Estimated Payments Work
When the entity makes the PTE election, Illinois expects estimated PTE tax payments throughout the year, following the same quarterly schedule: April 15, June 15, September 15, and January 15. Underpayment at the entity level can trigger penalties, so the estimated payment calculation needs to account for the PTE obligation on top of whatever the individual owners were already paying personally.
In practice, owners can often reduce their own individual Illinois estimated payments by the amount the entity expects to pay on their behalf. The credit flows through at year-end. But timing matters: the entity has to make the payments on schedule for the credit to work as intended. A well-managed estimated tax calendar makes this straightforward. An owner who has been inconsistent on personal estimates should get that cleaned up before layering in the PTE.
For clients who use our year-round accounting services, we fold the PTE estimated payments directly into the quarterly check-in so nothing slips through. The entity payment replaces part of the personal payment, and the total out-of-pocket stays roughly the same while the federal deduction does its work.
Is the Illinois PTE Election Right For You in 2026?
It depends on three things: whether you’re meaningfully over the ~$40,400 SALT cap on a combined basis, whether your entity qualifies as a partnership or S-corp for federal purposes, and whether your federal marginal rate is high enough to make the deduction worth the administrative overhead. The old rule of thumb that any owner above a certain income threshold should just elect it is no longer accurate. The analysis is more granular now.
There are also situations where the election creates complications. If one partner is in a low federal bracket, the entity-level deduction benefits partners unequally. If the entity has losses in a given year, the election may not generate any benefit and could add unnecessary complexity. If you’re near or above the $500,000 income phaseout, the SALT cap is already compressing your personal deduction, which changes the tradeoff.
The right answer isn’t the same for everyone, but running the numbers takes about 30 minutes once the year-to-date income and SALT picture are known. That’s a conversation worth having before October, not after.
If you’re an S-corp or partnership owner in Illinois and you want to know whether the PTE election makes sense for your 2026 return, we’re happy to run through the numbers with you. The first conversation is always free, and there’s no pressure.
Reach out to the team at Thompson Flaherty, and we’ll take a look together.
