Straight to the Point
PTET Expiration Could Be Costly: Illinois’ Pass-Through Entity Tax (PTET) ends after 2025 unless extended, potentially exposing high-income business owners to tens of thousands in additional federal taxes despite the higher $40,000 SALT cap.
Impact Varies by Income and Structure: Business owners earning under $700K may see minimal change, but those with higher income, multiple partners, or significant property taxes face a much greater risk if PTET expires.
Planning Options Exist Now: Business owners can prepare by maximizing 2025 PTET benefits, leveraging Illinois tax credits and incentives, exploring entity structure adjustments, and strategically timing income and expenses for 2026 and beyond.
Illinois business owners face a looming tax shift: the state’s Pass-Through Entity Tax (PTET) is set to expire after 2025.
For years, PTET has allowed S corporations, partnerships, and LLCs to deduct Illinois income tax at the entity level, bypassing the federal cap on state and local tax (SALT) deductions. Without it, many high-income owners could see their federal tax bills climb, even with the recent One Big Beautiful Bill Act (OBBBA) raising the SALT cap to $40,000 through 2029.
The real question is how business owners can prepare now, maximize remaining benefits in 2025, and adjust strategies for a potentially different tax environment in 2026.
The End of PTET: Understanding the Impact
Under current Illinois law, pass-through entities can elect to pay Illinois income tax at the entity level at a rate of 4.95%. This payment becomes a federal business deduction, essentially converting what would be a limited personal SALT deduction into an unlimited business expense.
If PTET expires without renewal, Illinois pass-through owners would revert to paying state income tax individually, subject to the federal SALT deduction cap. While the OBBBA’s increase to $40,000 provides more deduction capacity than before, it may not fully offset the loss of PTET benefits for higher-income taxpayers.
Who Faces the Greatest Impact
The end of PTET won’t affect all business owners equally. Those facing the most significant exposure include:
- High-income single owners: Business owners with Illinois income tax exceeding $35,000-$40,000 annually (roughly $700,000-$800,000 in business income) will likely exceed the new SALT cap even without property taxes.
- Multi-owner entities: Partnerships and S corporations with multiple owners face coordination challenges, as each owner’s individual SALT situation affects the collective benefit of PTET.
- Owners with high property taxes: Those already approaching the SALT cap through property taxes have limited remaining capacity for state income tax deductions.
- Multi-state operations: Business owners with income in multiple states may find the loss of PTET creates complex planning challenges across jurisdictions.
In short, the loss of PTET will hit hardest for higher earners, multi-owner entities, and those with layered state or property tax exposure, making early planning essential to avoid unexpected federal tax costs.
Impact Comparison by Income Level
| Business Income | IL Tax Owed | PTET Benefit Lost | Net Impact After SALT Cap Increase |
|---|---|---|---|
| $300,000 | $14,850 | Minimal | Little to no impact |
| $750,000 | $37,125 | Moderate | $0-$5,000 additional federal tax |
| $1,500,000 | $74,250 | Substantial | $10,000-$15,000 additional federal tax |
| $2,500,000 | $123,750 | High | $25,000+ additional federal tax |
Assumes SALT cap fully utilized and 32% federal marginal tax rate. Individual results vary based on property taxes, other deductions, and filing status.
Three-Scenario Analysis
To illustrate how PTET’s expiration could affect different types of businesses, consider the following three examples across a range of income levels and ownership structures.
Scenario A: Mid-Size Restaurant Owner
Maria owns a restaurant through an Illinois S corporation generating $300,000 in annual income. Her Illinois income tax would be approximately $14,850, well within the new $40,000 federal SALT cap even considering property taxes.
Impact: Minimal. The increased SALT cap likely covers her Illinois tax liability completely.
Scenario B: Multi-Partner Consulting Firm
A successful consulting partnership with three equal partners generates $750,000 in Illinois income. The Illinois tax would be approximately $37,125, allocated equally among partners ($12,375 each).
Impact: Moderate. Partners with high property taxes may lose some deduction benefit, while others see minimal impact.
Scenario C: High-Income Professional Services Firm
A boutique Chicago law firm generates $5 million in Illinois income, creating an Illinois tax bill of $247,500. With five equal partners, that’s $49,500 each — already above the $40,000 SALT cap before even considering property taxes.
Impact: Very High. Each partner loses the ability to deduct nearly $10,000 of Illinois tax at the federal level. At a 32% marginal rate, that means $3,000+ in extra federal taxes per partner, on top of property tax exposure. At the firm level, this adds up to $50,000+ annually in lost federal tax benefits.
Strategic Alternatives to PTET
With PTET potentially off the table after 2025, Illinois business owners will need to look at other ways to manage their tax exposure. Fortunately, a range of federal strategies, state credits, and structural planning options remain available to help offset the impact and preserve tax efficiency.
High-Impact Federal Strategies
Business owners can use federal-level planning to optimize deductions and manage cash flow more effectively:
- Income and Expense Timing: Accelerate deductible expenses (e.g., equipment purchases, bonus payments, discretionary costs) into years with higher income, or defer income to years when deductions will be more valuable. The restoration of R&D deductibility under OBBBA also creates new timing opportunities.
- Strategic Prepayment and Bunching: Prepay state or property taxes and group other deductible expenses into alternating years. This “bunching” strategy helps taxpayers exceed the standard deduction in certain years, while taking the standard deduction in others.
Key Takeaway: Timing strategies are most effective when coordinated with overall business planning and cash flow needs.
Illinois Tax Credits and Incentives
Even without PTET, Illinois offers credits that directly reduce tax liability rather than just shifting deductions:
- Research & Development Credit: Provides a 6.5% credit for qualifying research expenses, with enhanced rates available for certain small businesses.
- EDGE (Economic Development for a Growing Economy) Credit: Rewards companies that create jobs or make capital investments, especially valuable for expansion-minded businesses.
- Workforce Development & Training Incentives: Offset state tax liability while simultaneously reducing business costs for employee training.
- Renewable Energy and Industry-Specific Credits: Targeted opportunities may apply depending on your sector, further lowering Illinois tax obligations.
Key Takeaway: Unlike PTET, these credits reduce your Illinois tax bill directly, creating economic benefits regardless of federal deduction limits.
Entity and Structural Planning
The potential loss of PTET makes it worthwhile to reexamine how your business is organized:
- Entity Structure Analysis: Single-owner businesses may benefit from reevaluating LLC vs. S corporation elections, while multi-owner entities should weigh whether their current structure maximizes SALT efficiency.
- Multi-State and Residency Planning: For businesses with income in multiple states, restructuring or residency planning may optimize overall state tax burdens. These strategies are complex, however, and must be carefully executed to avoid double taxation or compliance issues.
Key Takeaway: Entity and residency decisions can create meaningful savings but require careful planning and expert guidance.
Moving Forward Strategically
PTET’s potential expiration represents a substantial change for higher-income Illinois business owners, but it’s manageable with proper planning. The increased federal SALT cap provides meaningful relief for many taxpayers, and strategic alternatives can help offset remaining impacts.
Business owners earning above $750,000 annually should act now to model their 2026 tax scenarios and implement appropriate strategies. Those with lower income levels may find the impact minimal due to the enhanced federal SALT deduction.
At Ahlbeck & Cook, we help Illinois business owners navigate complex tax planning challenges and optimize their strategies for changing tax landscapes. Every Illinois business owner’s exposure is different. Whether your income puts you at minimal, moderate, or substantial risk, we’ll help you build the right strategy before 2026.
Contact Ahlbeck & Cook today to analyze your specific situation and develop a strategic plan for success, regardless of what happens with PTET in 2026.
