NEW MEXICO’S PASS‑THROUGH ENTITY TAX AFTER OBBBA: WHY PTET IS STILL A WIN‑WIN FOR PASS‑THROUGH OWNERS

David Holmberg, CPA - Balanced Equity Consulting-Santa Fe, NM

2/18/20264 min read

NEW MEXICO’S PASS‑THROUGH ENTITY TAX (PTET) AFTER OBBBA: WHY IT STILL BENEFITS PASSTHROUGH BUSINESS OWNERS

New Mexico business owners have more tools than ever to manage their tax bill, but that also means more moving parts to understand. The pass‑through entity tax (PTET) is one of those tools—and even after the One Big Beautiful Bill Act (OBBBA) increased the federal SALT cap, PTET is still a powerful planning opportunity for partnerships, multi‑member LLCs, and S corporations operating in New Mexico.

What Is New Mexico’s PTET?

New Mexico allows eligible pass‑through entities—partnerships, multi‑member LLCs, and S corporations—to elect each year to pay New Mexico income tax at the entity level instead of having all of that tax flow through to the owners’ personal returns. When a business makes this election, it files New Mexico’s PTE/S‑Corp return and pays New Mexico tax on its taxable net income.

The election is generally binding on all eligible owners for that year; you cannot “pick and choose” which owners are in or out. In return, the owners receive a New Mexico credit for their share of the PTET paid, which they claim on their individual New Mexico returns to offset their personal New Mexico tax.

How PTET Helps at the Federal and State Level

Here’s the core idea: PTET turns New Mexico income tax from a personal itemized deduction (limited by the federal SALT cap) into an ordinary business expense of the entity.
At the federal level, the PTET paid by the entity is generally deducted as a business expense, reducing the pass‑through income that lands on each owner’s federal return.
At the New Mexico level, that same PTET payment becomes a credit for each owner, applied against their personal New Mexico income tax.
The result is a two‑step benefit: lower federal taxable income from your business plus a dollar‑for‑dollar New Mexico credit that keeps you from paying the tax twice.

OBBBA, the Higher SALT Cap, and Why It Changes the Conversation

The One Big Beautiful Bill Act reshaped the individual SALT deduction rules but did not eliminate the need for entity‑level planning. Under OBBBA:

The federal SALT deduction cap increases to about 40,000 for most filers starting in 2025 (20,000 if married filing separately), with small annual inflation bumps through 2029.
The cap is scheduled to revert to 10,000 in 2030 under current law.
For higher‑income taxpayers, that 40,000 cap can be phased back down toward 10,000 as income rises, limiting the actual benefit of the higher cap.

In plain terms, OBBBA gives many households more room to deduct state and local taxes—but the benefit is both temporary and income‑sensitive, and the deduction is still capped. For New Mexico business owners with significant income, that means you may still be leaving state income tax on the table if you rely only on the personal SALT deduction.

Why PTET Still Matters in New Mexico

So if the SALT cap is higher, is PTET less valuable? Sometimes the raw marginal benefit shrinks, but PTET still solves problems that the expanded SALT cap does not.
Key reasons PTET remains attractive for New Mexico pass‑through owners:

Entity‑level deduction vs. capped itemized deduction
Even with a 40,000 cap, many New Mexico owners hit that limit quickly once you combine New Mexico income tax with local property taxes and any other state taxes. PTET lets the New Mexico income tax piece be deducted at the entity level, freeing up more of the personal SALT cap for property tax or taxes from non‑PTET states.

Protection for higher‑income owners
High‑income taxpayers are exactly the group most likely to see their “bigger” SALT cap phased down under OBBBA. For them, the personal SALT deduction may still be close to the old 10,000 limit, making the entity‑level deduction through PTET especially valuable.

Hedge against future law changes
The current higher cap has an expiration date and could change again with future legislation. PTET is built into New Mexico law as an ongoing regime, giving you a structural planning tool that does not depend on Congress leaving the SALT cap alone.

Clean alignment for multiple owners
With PTET, all eligible owners of a New Mexico entity benefit proportionally through reduced federal pass‑through income and New Mexico credits, instead of each owner separately wrestling with SALT limitations on their personal returns.

A Simple Example

Imagine a New Mexico S corporation with two equal owners and 400,000 of New Mexico‑source income. Suppose the New Mexico tax on that income is 20,000.
Without PTET: The 20,000 of New Mexico tax is paid by the owners personally and competes with property tax and other SALT items under the federal cap. Depending on income, they may not get a full federal deduction for all of those state taxes.
With PTET: The S corporation pays the 20,000 as PTET, deducts it as a business expense, and each owner gets a New Mexico credit for their share on their NM return, while keeping more room under the personal SALT cap for property taxes or taxes from other jurisdictions.
This is the “win‑win” in practice: lower federal pass‑through income and a New Mexico credit that effectively shifts the state tax burden to the entity level without increasing your overall New Mexico liability.

Is PTET Right for Your New Mexico Business?

PTET is not automatically right for every New Mexico partnership, LLC, or S corporation, but it is an option that should be on the annual planning checklist—especially in the OBBBA era. The decision comes down to your income level, your mix of state and local taxes, whether you itemize, and how the SALT cap and its phase‑outs affect you.

If you own a New Mexico pass‑through entity and want to understand whether a PTET election makes sense for your particular situation, this is exactly the kind of strategic work I help clients with every day. We can model both scenarios—PTET and no PTET—under the new SALT rules so you can see the numbers side by side before you elect.

CPA in Santa Fe, New Mexico. David Holmberg, CPA, Balanced Equity Consulting, tax firm, tax services, tax preparation, tax planning, business tax and accounting services, partnership and S-Corp passthrough entity taxation.