Iowa Pass-Through Entity Tax (PTET): Election, Rate, and Credit

The Iowa pass-through entity tax is an optional election that lets a partnership or S corporation pay Iowa income tax at the business level instead of passing the full liability through to its owners. The rate is 3.8% for 2025 and 2026, matching Iowa’s flat individual rate, and each owner receives a refundable Iowa credit for their share of the tax the entity paid.¹ The point of the election is federal: because the entity-level payment is a business expense, it reduces the income flowing to owners’ personal returns and sidesteps the federal cap on state and local tax deductions.

What the Election Actually Does

The 2017 Tax Cuts and Jobs Act capped the state and local taxes an individual can deduct on a federal return. Owners of pass-through businesses were hit hard, because partnership and S corporation income flows to personal returns where the SALT limit applies. Iowa’s PTET, created by House File 352 in May 2023, moves that state tax payment from the individual to the entity.²

The IRS approved the approach in Notice 2020-75, confirming that state income taxes imposed on and paid by a partnership or S corporation at the entity level are deductible in computing the entity’s taxable income. That deduction shrinks the income each owner reports federally. Final regulations haven’t followed the notice, but taxpayers can rely on it in the meantime.

The election doesn’t reduce total tax paid to Iowa. It moves where the payment happens so the federal deduction survives.

Who Can Elect

Any entity taxed as a partnership or S corporation for both federal and Iowa income tax purposes can elect. That includes S corporations, general partnerships, limited partnerships, limited liability partnerships, and multi-member LLCs taxed as partnerships or S corporations.²

Two categories can’t. Publicly traded partnerships under Internal Revenue Code Section 7704 are excluded. Single-member LLCs and other disregarded entities can’t elect either, since they don’t file their own partnership or S corporation returns.² A disregarded entity owned by an eligible partnership or S corporation doesn’t make its own election; the parent entity chooses.

The Rate

Iowa applies its highest individual income tax rate to the entity’s Iowa-apportioned taxable income. With the state now on a flat individual rate, that means 3.8% for tax years 2025 and 2026.³ A lower rate means a smaller entity-level payment and a correspondingly smaller federal deduction, but also less Iowa tax to begin with.

The Deadline and How to Elect

The election deadline changed in late 2024. For tax years beginning on or after January 1, 2023, an entity has six months after the original due date of its Iowa return to elect.⁴ Since partnerships and S corporations have a March 15 original due date, that lands the PTET election deadline on September 15. Entities and their advisors get real time to run the numbers before committing.

The election is made on the entity’s Iowa return, Form IA 1065 for partnerships or Form IA 1120S for S corporations, by checking the designated PTET box. Electronic filing is standard for the return and its payments.²

Once made, the election is irrevocable and binds the entity and every owner for that tax year. It cannot be undone after the deadline. Run the analysis before filing.

The Refundable Credit Owners Receive

When the entity pays PTET, each owner receives a refundable Iowa tax credit for their share of the tax paid. The credit appears on the owner’s Iowa Schedule K-1 and is claimed on Form IA 1040.⁵ It reduces the owner’s Iowa tax liability dollar for dollar.

Because the credit is refundable, if it exceeds the owner’s total Iowa tax liability, the state pays the difference as a refund.⁵ That protects owners whose other Iowa credits or deductions have already brought their liability below the PTET credit amount.

Nonresident Owners

Nonresidents get real filing relief. If all of a nonresident owner’s Iowa income comes from the electing entity, that owner may not need to file a separate Iowa individual return at all.² The entity-level payment satisfies the state obligation, and the refundable credit handles any overpayment.

Iowa also offers a separate composite return (Form IA PTE-C) for nonresident owners. An electing entity is not required to file a composite return for the same year. An entity that already filed a composite return can still make the PTET election for that year, but combining the two can create overpayment complications, and composite payments generally cannot be redirected to cover PTET liability after the composite return has been filed.²

Does the Election Still Pay Off After the 2025 SALT Cap Increase?

The One Big Beautiful Bill Act, signed in 2025, raised the individual federal SALT deduction cap from $10,000 to $40,000 starting with tax year 2025, with small annual increases through 2029. That takes some of the urgency out of the PTET workaround for lower-income owners, but it doesn’t take away its value.

The $40,000 cap phases down for taxpayers with modified adjusted gross income above $500,000, shrinking by 30 cents on every dollar above that threshold until it reaches a $10,000 floor. For owners with income above roughly $600,000, the effective SALT cap is still $10,000, and the PTET delivers the same benefit it always did.

Iowa’s PTET statute ties its own availability to the existence of the federal SALT limitation under Internal Revenue Code Section 164(b)(6).¹ Because Congress extended the cap rather than repealing it, the Iowa election continues to be available for 2026 and beyond. Whether it pencils out now depends more on each owner’s income than it did under the old $10,000 cap.

Tiered Entities

When one pass-through entity owns an interest in another, the credit mechanics get more complicated. If a lower-tier entity elects and pays PTET, it reports a credit on the K-1s issued to its owners. When an owner is itself another pass-through entity, that credit stays at the upper-tier entity’s level; it does not automatically flow through to the individuals behind it.

If the upper-tier entity makes its own PTET election, the K-1 income it received from the lower tier is taxed again at the entity level, but the upper tier can apply the credit it received from the lower tier against its own PTET liability. The only way individual owners at the top receive a PTET credit is for the upper-tier entity to elect separately. Stacking elections across tiers is allowed, but the same income can generate entity-level tax at multiple levels before credits net things out. Multi-tier structures should model the math before electing.

1
Iowa Legislature. Iowa Code 422.16C – Pass-Through Entity Election Entity-Level Tax Credit
2
Department of Revenue. Pass-Through Entity Tax (PTET)
3
Department of Revenue. IDR Announces 2026 Individual Income Tax and Interest Rates
4
Department of Revenue. IDR Modifies the Pass-Through Entity Tax Election Deadline
5
Department of Revenue. Composite and PTET Credit