The Delaware pass-through entity tax election lets a partnership, S corporation, or LLC taxed as either one pay Delaware income tax at the business level instead of passing that liability through to its owners. The point is federal: the entity-level payment is a business deduction with no cap, which sidesteps the federal limit on state and local tax (SALT) deductions that owners would otherwise hit on their personal returns. Whether the election actually saves money depends on each owner’s income, the mix of Delaware-source income, and the federal SALT cap, which sits at $40,400 for 2026.
What the Election Actually Does
Without the election, Delaware income tax on business profits flows to each owner’s personal return, where it counts against the federal SALT cap along with their property and other state taxes. IRS Notice 2020-75, issued in November 2020, confirmed that when a pass-through entity itself pays the state income tax, the payment is deductible at the entity level and does not count against any owner’s personal SALT cap.1Internal Revenue Service. Notice 2020-75 Delaware’s election was built on that guidance.2Delaware General Assembly. House Bill 489 – Pass-Through Entity Tax Provisions
The amount of Delaware tax paid is the same either way. The federal tax bill is what changes, because the business-level deduction is unlimited while the owner-level deduction is capped.
Who Can Elect, and Who Participates
The election is open to entities that don’t already pay income tax at the entity level: general and limited partnerships, S corporations, and LLCs taxed as a partnership or S corp. C corporations are out, since they already deduct state income tax without any cap problem.
Participation inside the entity is a choice too. The business decides which owners are “participating members,” and the PTET is calculated only on those members’ shares of Delaware-source income. Owners who stay out keep filing and paying Delaware tax individually on their share.
One boundary worth flagging: the election is a separate decision from Delaware’s existing withholding rules for nonresident owners, including the withholding required when a pass-through entity with nonresident members sells Delaware real estate.3Justia. Delaware Code 30-1606 – Withholding of Income Tax on Sale or Exchange of Real Estate by Nonresident Pass-Through Entities Those obligations continue regardless of whether the entity elects PTET, and pass-through entities with Delaware-source income still file the usual information returns reporting each member’s share.4Justia. Delaware Code 30-1605 – Returns
Rate and Calculation
The PTET rate is 6.6%, matching Delaware’s top individual income tax bracket (taxable income above $60,000).5State of Delaware Division of Revenue. Tax Rate Changes It applies to each participating member’s share of Delaware-source income, not total income.
For a business operating in more than one state, that means apportioning. Delaware uses a single-factor formula based on gross receipts: Delaware gross receipts divided by total U.S. gross receipts gives the share of income attributable to the state.6State of Delaware Division of Revenue. Corporate Income Tax FAQs This single-factor method has applied since 2020.
A quick example. An LLC has $2 million in total U.S. receipts and $400,000 of Delaware receipts, so 20% of its income is apportioned to Delaware. A participating partner with a $300,000 distributive share has $60,000 of Delaware-source income. At 6.6%, the PTET on that partner’s share is $3,960.
How It Shows Up on the Returns
Federal: the entity deducts the PTET payment when it figures its taxable income, so each participating member’s K-1 arrives with distributive income already reduced. The member reports the lower number. No separate federal election or form is needed.1Internal Revenue Service. Notice 2020-75
Delaware: a participating member subtracts their share of the electing entity’s income from their federal adjusted gross income when computing Delaware taxable income, so the same dollars aren’t taxed twice. A participating member cannot also claim Delaware’s personal credit for taxes paid to other states on that same income; the subtraction stands in for the credit. For resident members, the electing entity itself can claim a credit for taxes it paid to other states on income not attributable to Delaware, filling roughly the same role the member’s personal credit would have.2Delaware General Assembly. House Bill 489 – Pass-Through Entity Tax Provisions
Is the Election Still Worth It?
This is the live question now, because the federal SALT cap changed. From 2018 through 2024 the cap was $10,000, and the PTET workaround delivered a large federal benefit to almost any owner with meaningful state tax. Starting in 2025 the cap rose to $40,000, and for 2026 it is $40,400, indexed for inflation. The cap also phases down for taxpayers with income above $505,000, dropping 30 cents on every dollar above that threshold until it bottoms out at $10,000.
For an owner whose combined state and local taxes already fit inside the $40,400 cap, the election adds little or no federal benefit. The owners who still see real savings are the ones who clear the cap or land in the phase-down zone. A partner earning $700,000 with substantial state and property taxes will still hit an effective cap well under their actual state tax burden, and shifting the Delaware piece to the entity level recovers a deduction that would otherwise be lost.
For owners whose Delaware tax gets paid either way, the election itself doesn’t cost them anything in state tax. The question is whether the federal savings for the participating members justify the added compliance work. Running the numbers member by member before electing is the sensible approach.
Filing, Payment, and Deadlines
The election is annual and, once made, irrevocable for that tax year. The entity files its PTET election and return by the original due date of its federal return, which for calendar-year filers is March 15. Delaware grants a six-month filing extension, but the tax owed is still due on the original deadline; anything unpaid starts accruing interest.
Payments go through the Division of Revenue’s online portal. Entities expecting a meaningful PTET liability should make quarterly estimated payments on Delaware’s standard business schedule to avoid underpayment interest.
If a return comes in late, Delaware’s penalties are harsher for not filing than for not paying. The failure-to-file penalty is 5% of unpaid tax per month, up to 50%. The failure-to-pay penalty is 1% per month, up to 25%.7Justia. Delaware Code 30-534 – Failure to File Tax Return or to Pay Tax Interest on any underpayment runs at 0.5% per month from the original due date until paid.8Justia. Delaware Code 30-533 – Interest on Underpayment Both the filing and payment penalties can be waived if the entity shows reasonable cause and the delay wasn’t willful.