How Indiana’s Pass-Through Entity Tax Election Works

Indiana’s pass-through entity tax election lets an S corporation or partnership pay state income tax at the business level instead of passing the full tax to its owners, converting what would be a capped personal deduction into an uncapped federal business expense. The election was created by Senate Bill 2 in 2023, is made annually on the entity’s timely filed return, and uses Indiana’s individual income tax rate (2.95% for tax year 2026) applied to each owner’s share of adjusted gross income.¹²

Why the Election Produces a Federal Tax Savings

The savings come from a line the IRS draws between taxes paid by a business and taxes paid by an individual. State income tax an owner pays personally counts against the federal cap on state and local tax (SALT) deductions. The Tax Cuts and Jobs Act set that cap at $10,000, and the One Big Beautiful Bill Act raised it to $40,000 for most filers through 2029. Owners with large state tax bills still lose some or all of the benefit.

When the entity pays the tax, the IRS treats the payment as an ordinary business expense that reduces the entity’s income before anything flows through to owners on a K-1. IRS Notice 2020-75 confirmed that these entity-level state tax payments are deductible by the partnership or S corporation and sit outside the individual SALT cap.³ The owner then claims a refundable Indiana credit for the tax the entity paid on their behalf, so the state tax is not paid twice. Net result: the owner captures a federal deduction they would have partly or wholly lost paying the same tax personally.

Does the Election Still Pay Off After the Higher SALT Cap

The $40,000 cap raises a fair question for 2025 and beyond. For most Indiana business owners, the election still makes sense, and for three distinct reasons.

The entity-level deduction sits outside the SALT cap entirely. Even an owner now under the $40,000 personal cap benefits, because the PTET payment reduces the entity’s taxable income before it reaches the K-1. For partners, that reduction also lowers self-employment income. Personal state tax payments never reduce self-employment tax, so the entity-level path captures a savings the personal path cannot.

The $40,000 cap also phases down for higher earners. Individuals and couples above $500,000 see the cap shrink at a 30% rate, bottoming at $10,000 for the highest earners. Owners in that range face the same squeeze they faced under the old cap.

Shifting state tax to the entity can also drop an owner’s remaining itemized deductions below the standard deduction. When that happens, the owner takes the standard deduction federally and still gets the PTET’s entity-level deduction on top of it.

Who Can Elect

Only entities taxed under Subchapter K (partnerships) or Subchapter S (S corporations) qualify.⁴ An LLC qualifies only if it has elected federal partnership or S corporation treatment. An LLC taxed as a C corporation or treated as a disregarded entity cannot elect.

Eligible owners for credit purposes are individuals and certain trusts and estates subject to Indiana’s adjusted gross income tax. C corporations and other pass-through entities generally do not count as eligible owners. The election is voluntary and must be made by an authorized person, defined by statute as someone empowered to act for the entity under its governing documents or by owner agreement.⁵ All owners are bound by that single election for the year.

How and When to Make the Election

Timing is where entities most often lose this benefit, and the loss is permanent. For tax years beginning in 2023 and later, the election can be made at any point during the tax year or on the entity’s timely filed return, including extensions. Once the original return is filed without the election, the window closes. An amended return cannot add it.⁶

The election itself is made by checking the “PTET Return” box on page 1 of the entity’s return (Form IT-20S for S corporations, Form IT-65 for partnerships) and filing a completed Schedule PTET with computation codes 01 through 06.⁷ The older standalone IN-PTET form used for 2022 is no longer required.⁶ The election applies only to the year in which it is made and must be renewed every year.

Filing is done through INTIME, Indiana’s online tax portal.⁸ Paper filing is available but the Department of Revenue recommends electronic submission.

The Rate, Estimated Payments, and Safe Harbor

PTET equals each owner’s share of the entity’s adjusted gross income multiplied by Indiana’s individual income tax rate. For 2026 that rate is 2.95%, dropping to 2.90% in 2027.² The entity computes the tax separately for each direct owner and reports the figures on Schedule PTET.⁹

Estimated payments follow the corporate schedule. Calendar-year filers pay on April 20, June 20, September 20, and December 20. Fiscal-year filers pay on the 20th day of the fourth, sixth, ninth, and twelfth months of their year.¹⁰ These dates are not the federal quarterly dates. The final return and any remaining balance are due by the 15th day of the fourth month after the close of the tax year.¹¹

No underpayment penalty applies if each installment equals or exceeds the lesser of 20% of the current year’s PTET liability or 25% of the prior year’s PTET liability.¹⁰²¹²

How Owners Claim the Credit

Once the entity has paid, each owner claims a refundable credit on their Indiana return. The entity provides documentation (typically on Schedule IN K-1) showing that owner’s share of the tax paid. Resident owners claim the credit on Schedule 5 of Form IT-40. Nonresident and part-year resident owners use Schedule F of Form IT-40PNR.

Because the credit is refundable, any amount above the owner’s Indiana liability comes back as a refund rather than being forfeited. That matters when an owner’s share of PTET runs higher than their personal state tax, whether because of other credits, county tax differences, or variations in income.

The entity’s identification number and the credit amount on the personal return must match what the entity reported on Schedule PTET. Mismatches are a common cause of processing delays. If a K-1 looks wrong, fix it with the entity before filing personally rather than trying to patch it later with an amended individual return.

Nonresident Owners and Income Earned in Other States

Electing PTET does not relieve an entity of its composite return obligation. Indiana generally requires pass-through entities to file composite adjusted gross income tax returns for nonresident owners, and that duty continues under PTET. Composite tax the entity remits is treated as tax withheld on the nonresident’s behalf.¹³

Multistate income is handled by owner type. A nonresident owner’s PTET is computed on Indiana-apportioned income only. For resident owners, the entity may compute PTET on either 100% of the owner’s share or just the Indiana-apportioned portion.⁹

Indiana also allows a credit against PTET for substantially similar entity-level taxes paid to other states. For resident owners, the credit equals the out-of-state income times the lesser of Indiana’s rate or the other state’s maximum individual rate. Nonresidents whose home states do not offer a reciprocal credit for Indiana PTET may file Form IT-40PNR to claim a refund of their Indiana PTET credit directly.⁹

What to Weigh Before Checking the Box

The election fits some entities cleanly and others poorly. A few things to work through first:

Owner alignment. The authorized person makes the election for the whole entity, and every owner is bound for that year. If some owners gain more than others, or some take the standard deduction already, the election can create friction. Handle that conversation before the deadline.
Cash flow. Estimated payments start in April of the tax year, often before the business knows its full-year income. The entity needs the liquidity to hit the safe harbor each quarter.
No second chances. Once the return is filed, the election cannot be added or removed by amendment. If the decision is still open at the due date, file an extension rather than filing early without the election.
Compliance cost. PTET adds complexity to the entity return and to every owner’s individual return. Expect higher preparation fees, especially in the first year.

For entities whose owners carry large state tax bills or sit above the SALT phaseout thresholds, the federal savings generally dwarf the added compliance cost. The math is less clear for smaller entities whose owners already fall under the $40,000 cap and take the standard deduction. Running the numbers both ways before the deadline is the only reliable way to know.

1
Indiana General Assembly. Senate Bill 2 – Taxation of Pass Through Entities
2
Indiana Department of Revenue. DOR: Rates Fees and Penalties
3
Internal Revenue Service. Notice 2020-75
4
Indiana General Assembly. Indiana Code 6-3-2.1-2 – Definitions
5
Indiana General Assembly. Indiana Code 6-3-2.1-3 – Authorized Person; Pass Through Entity Tax Election; Applicability of Election
6
Indiana Department of Revenue. DOR: Pass Through Entity Tax: FAQ
7
Indiana Department of Revenue. Indiana IT-65 Partnership Return Booklet
8
Indiana Department of Revenue. INTIME
9
Indiana General Assembly. Indiana Code 6-3-2.1-5 – Computation of Tax; Refundable Credit; Applicability of Other Credits
10
Indiana Department of Revenue. Income Tax Information Bulletin 72B
11
Indiana Department of Revenue. General Tax Information Bulletin 303 – Corporate Income Tax Return Due Dates After Change in Federal Due Dates
12
Indiana Department of Revenue. Departmental Notice 3 – Interest Rates for Calendar Year 2026
13
Indiana Department of Revenue. Income Tax Information Bulletin 72