NYS Addresses Limitation on SALT Deduction
for Pass-Through Entity Owners Starting 2022
The federal limitation on the deductibility of state and local taxes (SALT) negatively impacts New Yorkers, especially the owners of pass-through entities (PTEs), e.g., partnerships and S corporations. Those owners are limited on the SALT deductions for state tax payments they’ve made that are attributable to the income from PTEs.
However, part of the fiscal year 2022 New York State budget includes a workaround that effectively allows New York State PTE owners a deduction for taxes owed on income generated by the PTE. This will be done by having the PTE make quarterly estimated NYS tax payments and having the PTE deduct those payments directly. So, the owner’s federal itemized deductions will not be increased by the SALT deduction—however, the net income of the PTE reported to the owner will be reduced by the SALT deduction. Mechanically, the PTE owners will report the PTE income on their NYS tax return, but they’ll also take credit for the taxes paid by the PTE.
The budget is brand new and we are waiting for much-needed additional guidance. This is what we know so far:
The tax rate for the PTE will be graduated as follows:
Taxable Income | Tax | Tax Rate |
$0-$2,000,000 | $0 | 6.85% |
$2,000,000-$5,000,000 | $137,000 | 9.65% in excess of $2,000,000 |
$5,000,000-$25,000,000 | $426,500 | 10.30% in excess of $5,000,000 |
$25,000,000 and above | $2,486,500 | 10.90% in excess of $25,000,000 |
Other highlights of the new budget provision: There will be joint and several obligations that the owners have on the payments due by the PTE. Excess credits will be treated as overpayments by owners and, therefore, will be refundable. Only one election will be allowed per year and the election is irrevocable. And there will be resident credits available but apparently only with states with similar PTE tax regimes.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.