Should You Revoke Your Michigan PTET Election Now That the SALT Cap Is $40,000?

The Michigan flow-through entity tax election made obvious sense when the federal SALT deduction cap was $10,000. Almost every Michigan LLC and S-corporation owner I worked with through 2024 elected in. The math was clean. The state income tax that would have been stranded above the cap got fully deducted at the entity level instead.

The One Big Beautiful Bill Act raised the SALT cap to $40,000 starting with the 2025 tax year. The math is no longer clean. Some clients should keep the election. Some should let it lapse. Some should run the numbers for the first time in years and find that the election has been costing them in compliance fees while saving them nothing.

This article is for owners who already made the election and are not sure what to do for 2026 and 2027. If you have not heard from your CPA about this question, you are not alone. The SALT cap raise was reported as good news for itemizers, and very few outlets carried the story forward to the second-order effect on PTET elections.

How the Michigan PTET Works

Michigan Public Act 135 of 2021 created the optional flow-through entity tax. An LLC taxed as a partnership, an S-corporation, or a partnership can elect to pay Michigan income tax at the entity level on its allocable Michigan income. Each owner then claims a refundable credit on their personal Michigan return for their share of the entity-level tax.

The federal benefit comes from how the IRS treats entity-level state taxes. Notice 2020-75 confirmed that PTET payments are deductible at the entity level as ordinary business expense and are not subject to the federal SALT cap on individual returns. The entity gets a federal tax deduction for its state income tax, the owner avoids the SALT cap on that same income tax, and the result is a federal-level workaround.

The election is made on Form MI-PTE by March 15 of the year following the tax year (so March 15, 2027 for tax year 2026). The election is annual. Many entities renew automatically each year through their accountant.

Why It Worked at a $10,000 Cap

Take the sole owner of an S-corporation earning $300,000 in K-1 income from Michigan operations. Without PTET, that owner pays roughly $12,750 in Michigan personal income tax (Michigan's 4.25 percent flat rate). On the federal Schedule A, only $10,000 of the combined state income tax and property tax was deductible. If property tax was $7,000, the owner had $19,750 in SALT but could deduct just $10,000. The other $9,750 was lost to the cap.

With PTET in place, the S-corporation paid that $12,750 in Michigan tax at the entity level, fully deducted it as a federal expense, and the owner picked up only $300,000 minus the $12,750 of K-1 income on the federal return. Combined with the $7,000 property tax (now under the personal $10,000 cap), the owner captured the full deduction on every dollar of state and local tax. That is why everyone elected.

The Math Changes at $40,000

At a $40,000 cap, the same owner has $19,750 in SALT, well under the cap. The owner can deduct every dollar on Schedule A without needing the entity-level workaround. PTET still works mechanically (the entity pays, the owner claims a credit), but the federal benefit is now zero. If you had been saving roughly $9,750 in deductions multiplied by your federal marginal rate, call it $2,400 to $3,200 a year, that benefit just disappeared.

For PTET to still produce a federal benefit, the owner has to be over the cap from non-PTET sources. That happens when there is a high-tax second residence outside Michigan, a working spouse with significant W-2 state withholding from another state, or a mix of pass-through interests across states whose combined state income tax already eats into the $40,000 cap.

In numerical terms, a married couple in Oakland County with a single Michigan S-corporation generating $400,000 of K-1 income, $11,000 of property tax, and no out-of-state income has roughly $28,000 in SALT (about $17,000 in state income tax plus $11,000 in property tax). They are well under $40,000. PTET produces nothing federally for them in 2026.

Who PTET Still Helps

PTET is still valuable when the owner's cumulative SALT exposure stays above $40,000 even after deducting the PTET-paid amount. That covers a few specific situations.

First, owners with substantial property tax outside Michigan. A second home in a high-property-tax state can push combined property tax over $25,000 alone. Layer that onto a $20,000 Michigan state income tax bill and you are well past the cap.

Second, owners with K-1 income from pass-throughs in multiple states. An owner with a Michigan S-corporation and a New York LLC may already have $30,000 in combined state income tax before considering Michigan property tax.

Third, partnerships and S-corporations with multiple owners where some are over the cap and some are not. The election is made at the entity level for all owners. If a majority benefits, the election may still make sense even if a minority does not.

The Revocation Question

For tax year 2026, the election decision has already been made. The Michigan election is made on a year-by-year basis, so even if you elected in 2025, you can decline to elect in 2026 by not filing the form by March 15, 2027. There is no formal revocation. You let the next year's election lapse.

The trickier question is what to do about the current year. If the entity has already made quarterly PTET payments for 2026, those dollars are sitting in the Michigan Treasury. Recovering them runs through filing a return claiming the credit at the owner level, which then offsets the owner's individual liability or generates a refund. There is no clean way to undo a partial-year election. The cleanest path for owners who decided the math no longer works is to let the next year's election lapse and use 2026 as a transition year.

Practical Steps Right Now

Run two scenarios for 2026 and 2027.

Scenario A: Continue PTET. The entity pays state tax. The owner reports K-1 income net of state tax. The owner claims a refundable credit on the Michigan return. SALT exposure on Schedule A is limited to property tax and any non-PTET state income tax.

Scenario B: Revoke. The entity stops paying state tax. The owner pays Michigan state income tax personally. The owner claims that state income tax plus property tax on Schedule A, subject to the $40,000 cap.

If Scenario B produces the same or better federal tax outcome, you can save the entity hundreds of dollars per year in CPA fees, simplify quarterly estimated tax compliance, and avoid the look-back risk of Michigan auditing the PTET reconciliation. For owners whose total SALT is well under $40,000, the simplification alone is worth the change.

Common Mistakes I See

The mistake most owners are making is doing nothing. They elected PTET in 2022 or 2023, the bookkeeper carried it forward into 2025, and no one rerun the math after the OBBBA cap raise. The election is on autopilot in spreadsheets that pre-date the change.

The opposite mistake is dropping the election without checking the multi-state picture. An owner who only thinks about Michigan tax may revoke and lose a real federal benefit because they forgot about a New Jersey rental, a California consulting client, or a working spouse's out-of-state W-2.

A third mistake is treating the question as one-time. The federal SALT cap is now a permanent feature of the Code at $40,000, with phaseouts above certain incomes and modest inflation indexing. Your SALT picture will change every year as property tax bills rise, businesses grow, and personal circumstances shift. The PTET decision should be revisited annually, not made once and forgotten.

When You Should Call Me

If you have a Michigan flow-through entity with annual income over $250,000, made the PTET election in any prior year, and have not had a fresh conversation with a tax advisor about whether the election still makes sense, you should run the math. I am happy to do that as part of a free 30-minute strategy session. Bring your most recent K-1, your latest Schedule A, and a rough sense of any out-of-state tax exposure. Thirty minutes is usually enough to know whether you should keep the election, let it lapse for 2027, or do something more complicated.

For multi-state pass-throughs or larger entities, the analysis is meaningfully harder. State conformity rules differ. The federal consequences interact with the Section 199A QBI deduction calculation and basis tracking. That work is more involved, but the dollar values usually justify it.

Tax planning is most valuable when a rule changes and the conventional wisdom has not caught up. The OBBBA SALT cap raise is one of those moments. The bigger cap helps almost every itemizer at the personal level, but it quietly stops PTET from doing what most Michigan flow-through owners elected it to do. Re-running the math now, before your next election deadline, is one of the highest-return tax planning moves available to you in 2026.