Figures: tax year 2026
A pass-through entity tax is a state income tax imposed on a partnership or S corporation under the state's mandatory or elective regime. For state and local taxation, the entity-level payment changes the taxpayer and federal deduction treatment; it does not replace nexus or income assignment.
- Qualifying entity income-tax payments reduce the entity's federal nonseparately stated income under the Internal Revenue Service guidance.
- Such payments are outside the owners' individual state and local tax deduction limitation. Owner credits, exclusions, or other relief depend on the state's regime.
- An entity merely remitting an owner's personal tax does not establish that the tax was imposed on the entity.
The One Big Beautiful Bill Act (OBBBA) amended the individual state and local tax (SALT) deduction limitation. Under OBBBA, the individual state and local tax deduction cap is $40,400 (2026) for single and joint filers before the income-based reduction.
Modified adjusted gross income (MAGI) for this limitation is adjusted gross income (AGI) increased by the specified foreign-earned-income and territorial-income exclusions.
Common mistakes
- Assuming an employee defeats protection. Linden's solicitation employee preserves the protection in Example 1; recurring paid repairs change the conclusion in Example 2.
- Apportioning allocated income. Multiplying Cedar's entire adjusted base gives $640,000 x 30% + $25,000 = $217,000, incorrectly retaining both rentals in the business pool.
- Omitting the allocated addition. Reporting only $600,000 x 30% = $180,000 omits Alder's separately assigned $25,000.
Bottom line
- Nexus supplies the connection supporting a jurisdiction's power to impose a particular tax or require its collection.
- Qualifying interstate solicitation protection can bar net income tax while other tax and filing obligations remain.
- Apportionment divides business income by geographic factors; allocation assigns nonbusiness items under category-specific state rules.
- State taxable income combines apportioned business income and net income specifically allocated to that state, with other stated adjustments applied at their prescribed stages.
Exam shortcut
Read the requested output first. For nexus, identify the tax and actual activities. For a dollar answer, mark the starting base, modifications, income classifications, sourcing rules, and weights. Set aside a separate column for allocated income before calculating percentages. Label each item with its destination so an out-of-state allocation cannot reenter the final addition. Put the sum of weights in the denominator before entering the factors.
The full lesson (about 4,659 words, 31 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- V.B2
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