PTETaxDesk / 2026 State PTET & $40k SALT Guides / State PTET Overpayments & Refunds: IRC § 111 Tax Benefit Rule Trap for Pass-Through Owners
State PTET Overpayments & Refunds: IRC § 111 Tax Benefit Rule Trap for Pass-Through Owners
State PTET Overpayments & Refunds?
Under IRC § 111 (the Tax Benefit Rule), if an S-Corporation or Partnership overpays state PTET in December to inflate its above-the-line federal deduction, any resulting state tax refund or refundable credit received by the owner in the following year is fully taxable as ordinary federal income.
Under IRC § 111 (the Tax Benefit Rule), if an S-Corporation or Partnership overpays state PTET in December to inflate its above-the-line federal deduction, any resulting state tax refund or refundable credit received by the owner in the following year is fully taxable as ordinary federal income.
Open 2026 $40,000 SALT Cap vs. State PTET Calculator
2026 PTET & SALT Compliance Checklist
- Adopt a Written Partner/Shareholder PTET Consent Resolution: Keep signed authorization in your corporate or partnership minute book.
- Remit Cash-Basis Vouchers Before December 31, 2026: Under IRS Notice 2020-75, cash-basis entities can deduct 2026 PTET only to the extent paid by December 31, 2026.
- Avoid Overpayment Refunds (IRC § 111): Base your Q4 PTET payment on actual projected 2026 state liability so next year's state refund isn't recaptured as ordinary federal income.
Frequently Asked Questions
State PTET Overpayments & Refunds?
Under IRC § 111 (the Tax Benefit Rule), if an S-Corporation or Partnership overpays state PTET in December to inflate its above-the-line federal deduction, any resulting state tax refund or refundable credit received by the owner in the following year is fully taxable as ordinary federal income.