If you’re a high-earning 1099 physician in a high-tax state, you may already be using business structures like S corporations to reduce your tax burden.
But the 2017 Tax Cuts and Jobs Act (TCJA) added a wrinkle: the state and local tax (SALT) deduction cap of $10,000. This change made the traditional deduction strategy less effective, especially for high earners.
But there’s one workaround that’s become especially valuable in recent years: the pass-through entity tax (PTET). Now, with new changes from the One Big Beautiful Bill Act (OBBBA), even this strategy is evolving.
In this guide, we’ll walk you through what PTET is, how it helps you bypass the SALT cap, what the latest legislation changes are, and what locum tenens physicians should do next to stay compliant and tax-efficient.
Why The SALT Deduction Cap Matters To High-Earning Locum Physicians
The SALT deduction lets taxpayers reduce their federal taxable income by deducting the amount they paid in state and local taxes. However, the TCJA capped that deduction at $10,000 (or $5,000 for married individuals filing separately), which was a significant blow to physicians in high-tax states like California, New York, and New Jersey.
If you’re earning well into six figures as a locum tenens provider, this cap likely means:
- Higher federal tax bills
- A greater chance of double taxation
- You get less benefit from itemizing your deductions
The OBBBA temporarily increases the cap starting in 2025 (details below), but for many high earners, the benefit is limited. That’s why PTET remains a critical planning tool.
What Is PTET And How Does It Work?
Pass-through entities, like S corporations, partnerships, and LLCs, pass income through to owners, who report it on their personal returns. That structure worked well until the SALT cap hit.
PTET changes that. Instead of paying state taxes as an individual, your entity pays them on your behalf. This allows the business to deduct the state tax at the federal level, exempt from the $10,000 SALT cap. That means more federal deductions and potentially lower tax liability for locums.
A Game-Changing IRS Notice
In late 2020, the IRS issued Notice 2020-75, confirming that PTET payments are deductible at the federal level and not subject to the SALT cap. This retroactive ruling (effective as of December 31, 2017) gave states the green light to adopt PTET regimes and gave locum physicians a powerful way to reclaim deductions.
PTET Is Available in 34 States (And Counting)
As of 2025, 34 states have adopted PTET elections, including:
- Northeast: Connecticut, Massachusetts, New Jersey, New York, Rhode Island
- Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Wisconsin
- South: Alabama, Arkansas, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Virginia, West Virginia
- West: Arizona, California, Colorado, Hawaii, Idaho, New Mexico, Oklahoma, Oregon, Utah
To benefit, you need to:
- Form a pass-through entity (e.g., LLC)
- Elect S corporation status (in most cases)
- File for PTET status in your state
Each state has its own rules and deadlines, so coordination with a CPA is key.
What The OBBBA Changes: A Higher SALT Cap (With Strings Attached)
Starting in 2025, the SALT deduction cap will increase:
- From $10,000 to $40,000 (or $20,000 for married filing separately)
- With 1% annual increases through 2029
- Reverting back to $10,000 in 2030
But here’s the catch: If your modified adjusted gross income (MAGI) exceeds $500,000 in 2025 ($505,000 in 2026), the new cap starts to phase out. Once fully phased out, you’re back to the $10,000 limit.
Why PTET Still Matters, Even With The Higher SALT Cap
For many high-income locum physicians, the increased cap may offer limited relief:
- State taxes can still exceed $40,000
- The benefit disappears at high income levels
- SALT deductions require itemizing; PTET works even with the standard deduction
- PTET simplifies multistate tax filings if you work in multiple PTET-participating states
In short, PTET remains one of the most effective tools for minimizing federal tax liability.
Legislative Threats To PTET: What Didn’t Happen
Early drafts of the OBBBA included provisions that would have:
- Barred PTET use by specified service businesses, like healthcare
- Disqualified pass-throughs not meeting a 75% qualified income test
Fortunately, those clauses were dropped. The Senate version, which left PTET intact, passed into law. But as always, legislation can change. Staying vigilant is essential.
Action Steps For Locum Tenens Physicians
If you’re already using PTET, or thinking about it, here’s what to do next:
- Talk to a CPA: Ensure your business structure is still optimal in light of the new SALT cap and your income level.
- Monitor your income: If you’re near the $500,000 threshold, understand how phase-outs might apply.
- Stay compliant: Deadlines and rules vary by state. Missing a PTET election deadline could cost you big.
- Plan for cash flow: PTET payments often require advance estimates. Prepare accordingly.
You Don’t Have To Figure This Out Alone
Tax law is always changing, but one thing remains constant: proactive planning puts you in control. At The Doctor’s CPA, we help locum tenens physicians navigate SALT workarounds, entity structure decisions, and multistate compliance.
If you’re ready to simplify your taxes and maximize your deductions, schedule a consultation today. We’ll help you make the most of PTET and everything that comes with it.