Don't Default to Buying the Truck

Every December, an advisor tells a business owner to buy a truck. Or new equipment, or next year's supplies paid early. Assuming the purchase is fully deductible this year and taxed at the top 37% rate, spending $100,000 saves $37,000 of federal tax and leaves you $63,000 out (plus a truck you may not have needed).

Consider instead a year-end deduction that requires no shopping: the state income tax you'll pay anyway.

The move

Most states with an income tax let an LLC or partnership or S corporation pay its owners' state income tax itself. That's the pass-through entity tax, or PTET. The business deducts it federally, and the owners take a state credit for what it paid.

Alternatively, if the same tax is paid personally as an itemized deduction, it’s part of a basket of state and local taxes (SALT) capped at $40,400 for 2026 and shrinking to $10,000 as income climbs. The higher cap is temporary: under current law it reverts to $10,000 for everyone in 2030. The PTET skips the itemized SALT cap.

When the cap was $10,000 the advice was easy: elect and pay. But now, a cap four times bigger changes the math. Owners who can now deduct their state tax in full may lose money on PTET, because the business deduction also shrinks their 20% pass-through deduction.

One firm, three answers

Consider a hypothetical three-partner Chicago consulting firm earning about $1.99 million. Illinois taxes that income at 4.95% either way: the partners pay it personally, OR the firm elects to pay it (about $98,500 of PTET) and each partner takes a credit. Same tax, same cash. The federal results split three ways:

Illustrative example only. Figures assume 2026 federal law, married filing jointly. Results depend on individual facts, are not typical, and are not a prediction of any outcome.

Ana already deducts all of her state tax, so PTET just trims her pass-through deduction. She’s actually worse off. Claire is far past the cap, so every PTET dollar rescues tax the cap was wasting – a good move. However, Marcus is the interesting one.

The sweet spot

Marcus and his wife report about $580,000, nearly all from the firm, and pay about $20,000 of property tax. That puts them inside the phase-down band, so here's their 2026 return figured both ways:

Illustrative example only; assumptions as above. Also assumes about $25,000 of other itemized deductions and that W-2 wage and property limits on the 20% pass-through deduction do not apply.

Three lines moved. The payment came straight off their income. Lower income lifted the cap, and their other state and property taxes filled about $4,100 of the new room. And because consulting is a professional field (like law or medicine) whose 20% deduction phases out over a similar income range, lower income brought back about $20,500 of it.

In this example, federal tax fell by about $16,800, or roughly 63% of the PTET paid. Take away either of the last two pieces (no property tax, or a business outside the professional fields) and it drops to roughly 30 cents. Results vary with each owner's facts.

So here's the sweet spot I'd look for: married owners of professional practices earning $505,000 to roughly $606,000, with enough other state and property tax to fill the room PTET reopens. Above the band PTET still pays well; comfortably under the cap, it often isn't worth the trouble. 

A rulebook for every state

States are a smorgasbord of regulations for PTET. Utah counts only tax paid by December 31. California now trims the owners' credit by 12.5% of any shortfall in the June 15 prepayment, so a December-only payment can cost credit. Connecticut credits owners only 87.5% of what the business pays. New York's 2026 election to even play the game closed in March (electing businesses can still pay December 16 through 31). Arizona won't credit its residents for PTET paid to California or Oregon, and Washington has none to elect. It’s not rocket science, but you’ll want to speak with an expert that knows your state.

Cash, and the cost of a guess

December cash gets tight. Start with the owners' January 15 estimated taxes: money already set aside for them can often go out through the business a few weeks early. Also,  don't be tempted to overshoot. I can see your gears turning, “What if I pay an enormous amount to PTET, deduct it all on the business return, and then get a refund?”  States don’t like this. An overpayment often becomes a non-refundable credit that takes years to use, or a refund can come back as taxable income. Federal and state PTET rules can change, and each owner's results also depend on other factors such as self-employment tax and basis.

Deadlines get people moving, but often make their decisions sloppier. For example, on December 28, "send the state $50,000" feels like a plan. It's a guess. As Ana (negative-5%) shows, a guess can help one owner and cost another.

Your next step

Payments generally have to go out by December 31, so request a PTET review in November. Bring the business's 2026 projection, each owner's home state, every estimate paid this year (personal and business), your property-tax bills, and how much cash the business can spare by mid-December. 

 

AUTHOR’S NOTE: This article was written in October 2026, before the November 3, 2026 vote on Initiative 645. I-645 would repeal Washington's new 9.9% tax on individual income over $1 million, scheduled to begin in 2028. The measure would also bar other state and local taxes on individual income, and its effect on the PTET election is unsettled. That law also creates a Washington PTET election, and a separate court challenge to it is still pending. Nothing changes for 2026: Washington has no PTET to elect this year. If you live in Washington or own a business there, ask your advisor where the tax stands before planning for 2028.

 

Composition Wealth, LLC (“Composition Wealth”) is a registered investment adviser. Advisory services are offered only to clients or prospective clients where Composition Wealth and its representatives are properly licensed or exempt from licensure.

This communication is for general informational purposes only and should not be considered investment, financial, tax, or legal advice. It should not be treated as a solicitation to buy or sell securities and does not consider individual investment objectives, strategies, tax status, or horizon. Please consult your own tax, legal and accounting advisors before making any related decisions.