The Delaware pass-through entity tax lets partnerships, S corporations, and LLCs taxed as either one pay Delaware income tax at the entity level rather than passing the liability through to their owners. The election is voluntary, made year by year, and its main appeal is federal: the entity deducts the state tax payment before income reaches any owner’s K-1, sidestepping the federal cap on state and local tax deductions. Whether it saves real money depends on your owners’ income levels and how much of the entity’s income is sourced to Delaware.
What the Election Actually Does
Before pass-through entity taxes existed, state income tax on business income flowed to owners’ personal returns, where it counted against the federal SALT cap alongside property and local taxes. IRS Notice 2020-75 confirmed that when a pass-through entity itself pays the state tax, the payment is deductible at the entity level and does not count against any owner’s SALT cap.1Internal Revenue Service. Notice 2020-75 Delaware built its PTET on that guidance. The entity pays Delaware tax directly, each participating owner’s share of income arrives already reduced, and no federal form or election is required from the owner.2Delaware General Assembly. House Bill 489 – Pass-Through Entity Tax Provisions
The same amount of Delaware tax still gets paid. The federal bill goes down because the entity-level deduction has no cap.
Who Can Elect
The election is open to entities that don’t already pay tax at the corporate level: general and limited partnerships, S corporations, and LLCs taxed as partnerships or S corporations. C corporations are excluded because they already deduct state income taxes without cap issues.
Not every owner has to be in. Delaware treats owners as “participating” or “electing” members, and the entity picks who’s covered. The PTET is calculated only on the participating members’ shares of Delaware-source income; anyone left out continues to report and pay Delaware tax on their own return.
The Rate and the Delaware-Source Piece
The PTET rate is 6.6%, matching Delaware’s top individual rate, which kicks in on taxable income above $60,000.3State of Delaware Division of Revenue. Tax Rate Changes It applies to each participating member’s share of Delaware-source income, not the entity’s total income from everywhere.
Multi-state entities have to figure out what counts as Delaware income. Delaware uses single-factor apportionment based entirely on gross receipts: Delaware gross receipts divided by total U.S. gross receipts gives you the percentage of income attributable to Delaware.4State of Delaware Division of Revenue. Corporate Income Tax FAQs
Say an entity has $2 million in total U.S. receipts and $400,000 from Delaware customers. That apportions 20% of income to Delaware. If a participating member’s share of total entity income is $300,000, only $60,000 is subject to the 6.6% PTET, producing $3,960 in tax on that member’s slice.
How the Benefit Reaches Members
Federally, the work happens on the K-1. Because the entity already deducted its PTET payment, each participating member’s distributive share of income is smaller by the time it lands on their federal return. Nothing extra is required from the member at the federal level.1Internal Revenue Service. Notice 2020-75
On the Delaware return, participating members subtract their share of the electing entity’s income from federal adjusted gross income when computing Delaware taxable income. That prevents the same dollars from being taxed twice.2Delaware General Assembly. House Bill 489 – Pass-Through Entity Tax Provisions A participating member cannot then also claim Delaware’s personal credit for taxes paid to other states on the same income; the subtraction takes the place of that credit.
For resident members, the electing entity itself can claim a credit for taxes it paid to other states on income not attributable to Delaware, essentially standing in for the credit the member would have claimed individually.2Delaware General Assembly. House Bill 489 – Pass-Through Entity Tax Provisions
Whether the Election Still Pays Off
The PTET was most valuable when the federal SALT cap sat at $10,000, where it lived from 2018 through 2024. Starting in 2025 the cap rose to $40,000, and for 2026 it is $40,400, indexed for inflation. The cap phases down for taxpayers with income above $505,000, dropping 30 cents on the dollar until it floors out at $10,000.
For owners whose combined state and local taxes already fit under the $40,400 ceiling, the election adds little or no federal benefit. It still matters for high earners who breach the cap or land in the phase-down zone. A partner earning $700,000 with meaningful state and property taxes will hit an effective cap well below actual state tax owed, and the PTET deduction remains genuinely useful there.
The election has no direct downside for members who owe Delaware tax either way. The real cost is administrative. Run the projected federal savings for each participating member against the added compliance work before electing.
Filing and Payment Timing
The election is annual and irrevocable for the tax year it covers. The election and return are due by the original due date of the entity’s federal return, which for calendar-year filers is generally March 15. A six-month filing extension is available, but any tax owed still has to be paid by the original deadline to avoid interest.
Payments run through the Delaware Division of Revenue’s online portal. Entities expecting a significant PTET liability should make quarterly estimated payments on Delaware’s standard business schedule to avoid underpayment interest.
Penalties for Late Filing or Payment
Delaware treats not filing more harshly than not paying, which occasionally trips up businesses that assume the two penalties move together.
- Failure to file: 5% of unpaid tax for each month or partial month the return is late, capped at 50%.5Justia. Delaware Code 30-534 – Failure to File Tax Return or to Pay Tax
- Failure to pay: 1% of unpaid tax per month, capped at 25%.5Justia. Delaware Code 30-534 – Failure to File Tax Return or to Pay Tax
- Interest on underpayment: 0.5% per month on the outstanding balance from the original due date until paid.6Justia. Delaware Code 30-533 – Interest on Underpayment
- Fraudulent failure to file: 15% per month, capped at 75%.5Justia. Delaware Code 30-534 – Failure to File Tax Return or to Pay Tax
They stack. An entity that files three months late and still hasn’t paid can face up to 15% in filing penalties, 3% in payment penalties, and 1.5% in interest on the underlying balance. Both filing and payment penalties can be waived if the entity shows reasonable cause and the delay wasn’t willful.
Challenging an Assessment
If the Division of Revenue issues a proposed assessment you think is wrong, file a written protest with the Division within 60 days of the notice, laying out the specific grounds.7Division of Revenue – State of Delaware. Tax Appeal Process Individual income tax withholding disputes have a shorter 30-day window, and taxpayers outside the United States get 120 days on personal income tax matters.
If the protest doesn’t resolve the issue, the next step is the State Tax Appeal Board, which conducts an independent review of the Director’s determination.8Department of Finance. State Tax Appeal Board Its decision can then be appealed to Delaware’s Superior Court, but only if you file a notice of appeal within 30 days of the Board’s order.7Division of Revenue – State of Delaware. Tax Appeal Process The whole path, from written protest through Superior Court, can easily run past a year, so file the initial protest promptly to keep every option open.