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Pass-Through Entity Tax: What is it and Why It Matters for Dentists

If you own a dental practice that’s structured as a partnership or S corporation, you may have heard about the Pass-Through Entity (PTE) Tax. Many states now offer this tax election as a powerful way to reduce your federal income tax burden, but it’s often overlooked or misunderstood. 

In this article, we’ll break down what the PTE tax is, how it works, and the key benefits for dental practice owners. 

What Is the Pass-Through Entity (PTE) Tax?

The PTE tax is a state-level workaround to the federal cap on state and local tax (SALT) itemized deductions. Since 2018, individuals have been limited to deducting only $10,000 in SALT expenses on their federal returns. This hit many high-income professionals, like dentists, especially hard. 

To help taxpayers work around that cap, several states (including Illinois) allow pass-through businesses, like dental partnerships or S corporations, to elect to pay state income taxes at the entity level on behalf of its owners, rather than passing the tax liability to individual owners. 

How It Works

  • The entity (your dental practice) pays the state income tax on its net income.
  • This payment is fully deductible at the federal level as a business expense.
  • You, as an owner, receive a state tax credit on your personal income tax return for your share of the tax paid.

Key Benefits for Dental Practice Owners

1. Lowers Federal Taxable Income

Because the state tax is paid at the entity level, it’s deducted on the practice’s federal return, rather than being deducted if paid personally, where it is subject to the $10,000 SALT cap on your personal tax return. 

Example:

Let’s say your practice earns $400,000, and your state tax rate is 10%.

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Without the PTE election: You pay $40,000 in state taxes, but can only deduct $10,000 federally.

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With the PTE election: The practice deducts the full $40,000 on its federal return, reducing its taxable income by that amount.

2. Applies to Both Residents and Nonresidents

The PTE tax benefits all owners—whether they live in the state or not. That’s especially valuable for practices with partners who live out of state but still owe state income tax on their share of earnings. 

3. Improves Cash Flow Planning

Because the tax is paid by the entity, it can help smooth out your personal quarterly estimated tax obligations. It’s also easier to plan for at the practice level, especially if you work with a CPA who models it in advance. 

4. Works Alongside Other Tax Strategies

The PTE tax election complements other tax planning strategies:

  • Retirement plan contributions (e.g., 401(k) or defined benefit plans)
  • Section 179 expensing and bonus depreciation
  • Health insurance deductions for owners

When used together, these tools can maximize deductions, smooth cash flow and minimize your total tax liability. 

Important Considerations

  • Annual Election: Most states require you to elect PTE treatment each year. It’s not automatic. Many states also have deadlines on when you must make the election.
  • State-Specific Rules: Every state has different rules around eligibility, rates, and filing. Not all states offer a PTE option.
  • Coordination Is Key: Your entity needs to properly report and pay the PTE tax, and you’ll need to claim the correct credit on your personal state return.
  • Many states now offer a PTE tax, as of 2025

Next Steps

  • Talk to your CPA or tax advisor about whether your practice qualifies.
  • Make sure your entity is set up to make the election, track and pay the tax correctly.
  • Consider running projections before making the election to quantify the savings.

Final Thoughts

For dentists who operate as partners or shareholders in a pass-through practice, the PTE tax election can offer significant federal tax savings. It’s one of the most impactful, yet underutilized, strategies available today. 

Author: Laura Rodriguez